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The fire next time

Every attempt to make banks more responsible has made them more reckless. Unless the sector is radic

As the financial chaos that began with the collapse of Northern Rock in 2007 enters its second year, the question is: where do we want to be? Are the banks, as the British Chancellor of the Exchequer Alistair Darling has said, to use public capital to restore the relatively free-and-easy commercial conditions of the latter part of 2007? Or should we, as both Gordon Brown and Nicolas Sarkozy have suggested, try to use the 15 November meeting of the 20 chief industrial countries in Washington to establish a new era, like Bretton Woods in novelty if not character? With a new US president, in the person of Barack Obama, due to take office in January, the opportunity is for the taking.

Financial crises are like fireworks: they illuminate the sky even as they go pop. The disruptions of this autumn, the bank rescues, falling securities markets and currency turbulence, have revealed cracks and chips not merely in our financial system but in our general way of looking at the world. The expertise of the economists looks suddenly threadbare. As Robert Skidelsky, John Maynard Keynes's biographer, wrote in the Washington Post last month: "What is in even shorter supply than credit is an economic theory to explain why this financial tsunami occurred, and what its consequences might be. Over the past 30 years, economists have devoted great intellectual energy to proving that such disasters cannot happen."

Any new financial order for the world must tackle the three chief challenges of our age. The first is the privileges enjoyed by people in the banking and securities trade on a scale which would not have shamed the nobility of the ancien régime. The second is the perverse character of modern investment, by which financial surpluses generated by hard-working countries are channelled by the banks not to undeveloped nations that might turn them into prosperous future markets, but to the spoiled and elderly economies of western Europe and the United States, already awash with unproductive capital. The third is our most pressing engagement, which is to prevent further ravages to the natural environment and the general amenity of existence from the reckless combination of the previous two challenges.

The banking crisis that began in earnest with the failure of Lehman Brothers Holdings on 15 September, has lost its novelty as a public spectacle. As people turn back to their ordinary preoccupations, and to the prospect of President-elect Barack Obama, the bankers are lifting themselves up, dusting themselves down and preparing to do what they were doing before, only this time with £400bn of public money. However frightening the events of September and October, they were not frightening enough. As Eric Daniels, the chief executive of Lloyds TSB, put it: he did not expect the government, which has earmarked £17bn for a merged HBOS and Lloyds TSB, to "have an impact on our lending policies or conduct of business". At times our financiers sound like the Bourbon kings, who learned nothing and forgot nothing.

When the Bank of England cut the main rate of interest at which it lends to commercial banks on 6 November, by no less than 1.5 percentage points, the British banks must have thought Christmas had come early. When you can get your funds at an interest rate of 3 per cent and lend at 7 per cent, it is not hard to make money. With these windfall profits, the banks could soon rebuild their capital, repay the public loans and start making themselves lots of money.

The Chancellor and his team had other ideas. At a meeting at the Treasury on 7 November, senior commercial bankers were reminded, with the aid of some pertinent press cuttings, of just how unpopular they are. Now that the public owns Northern Rock and Bradford & Bingley, and is about to part-own Lloyds TSB, HBOS and Royal Bank of Scotland, ministers can no longer be ignored. Even Barclays, which has gone to great effort to avoid taking the UK government's money, raising £5.8bn at higher rates and more unfavourable terms from reluctant investors in Abu Dhabi and Qatar, is faced with the same public distrust and political interference.

Losing your capital is like losing your trousers. It is a real humiliation, and one not to be soon repeated. The British banks will be forced by the government to advertise attractive mortgages and other loans, but they will only make these loans on good security, and it is security that is in short supply. In the market for private housing finance, I imagine we will revert to the conditions of the 1970s, when buyers were expected to provide a quarter or even a half of the purchase price. Northern Rock, which has been longest at this sort of retrenchment exercise, had already reduced its outstanding loans by 10 per cent by the middle of the summer. The Bank of England estimates that, even with the extra share capital underwritten by the government, the largest UK banks would need to reduce their books of loans by around one-sixth to revert to the normal or half-normal level of 2003.

Banks will also try to shrink their establishments, bloated beyond all reason during the boom years or, as in the case of bank branches, maintained out of idleness and sentiment. If Lloyds TSB manages to consummate its union with HBOS, it intends to cut £1.5bn per annum by 2011 in overheads, particularly wages, from the combined business. A rough calculation suggests this could means a reduction of 20,000 staff.

At the heart of banking is a suicidal strategy. Banks take money from the public or each other on call, skim it for their own reward and then lock the rest up in volatile, insecure and illiquid loans that at times they cannot redeem without public aid. Put another way, the assets of the banking system belong to the joint-stock banks, but their liabilities (as we have learned in the past two months) are always and only public liabilities. I guess that is what the Chancellor means when he talks of the "part-nationalisation" of the banking system.

It is a dilemma that goes back to the origin of joint-stock banking at the turn of the 18th century. Whereas private bankers staked their credit, reputations and fortunes on their decisions to lend or not to lend, the shareholders and managers of joint-stock banks carried no such responsibility. That is why, in Britain at least, it was not until the 1870s that joint-stock banks received the protection of limited liability. Until then, their shareholders were liable for losses to the extent not just of their shareholding but of their entire property.

All attempts to regulate the banks have made this prudential problem, as it is known, worse. The Bank of England, which like so many institutions has suddenly become obsessed with history during the crisis in the same way that other people "get" religion, published in its latest Financial Stability Report a chart showing the effect of regulation on the caution of American bankers. In the 1840s, American banks held on average one dollar in their own funds to two dollars of loans and other assets such as government bonds. That meant that half their money was not earning anything, but also that half their loans could go bad without causing loss to depositors.

With the Civil War and the passing of the National Bank Act in 1864, that proportion fell to 25 per cent. In 1913, the Federal Reserve was founded and the proportion fell to 18 per cent. Since then, the bankers have managed to get various classes of asset exempted, and the proportion has fallen to under 10 per cent. Each attempt to make the banks more safe has made them more reckless. According to the Financial Stability Report, before the crisis of this autumn the chief UK banks had £200bn of their own capital to support £6trn worth of lending, a proportion of one in 30. As the Bank notes in a sort of wonder at the majesty of financial phenomena: "Recent events have illustrated that banks can now incur losses much faster than they can recapitalise themselves in stressed market conditions."

By choking off lending, the banks have set in train a decline in general trading activity that looks to be worse than those of 1991, 1982 and, possibly, 1974. My suspicion is that the semi-orderly contraction in bank lending envisaged by the Bank of England will drop us off in roughly the same place as if the likes of HBOS and Royal Bank of Scotland had been bankrupted. That, of course, can never be tested. Yet the result of the government rescue is to entrench a sort of banking nobility, endogamous and permanent, without responsibility and not subject to ordinary commercial law. It reinforces the vacuous and illiterate City culture of pecuniary display, cost-free philanthropy and nuisance travel. And it perpetuates banking practices whose eventual disintegration, ten or 15 years in the future, will make this crisis look routine.

So what is to be done with the banks? My own modest proposal, which has not many adherents, is to take away from joint-stock banks the privilege of limited liability which they abuse every moment of the day. That would certainly separate the sheep from the goats but would, perhaps, reduce the equity capital available to the banking system a little too sharply.

More realistically, now is the time for government authorities to begin slowly to peel back some of the other privileges, such as deposit insurance, that under the guise of protecting the public, merely protect the banker. What this means is that you and I will think for a moment before entrusting our money to a bank. We might ask for a balance sheet at the counter, the work of a few moments. We don't know how to read a balance sheet. The clerk will show us. The public, turned into infants by bank regulation, become adults again. Banks will be obliged by a discriminating public to carry more of their own capital. At Bradford & Bingley, the pretty woman in a green bowler becomes a plain man in a black one.

The second challenge, which arises from the imbalance of savings between west and east, is one that Keynes would have recognised even if, in his time, it was the US that had the money. The tendency of the west to borrow and spend and the east to save and lend is the shadow or phantom behind the banking crisis. China, Japan and the oil-exporting countries earned such colossal surpluses from their exports that they could find no other home for them than the indebted households and governments of the rich countries. In the case of the two Chinas, Japan, Russia and India, these hoarded surpluses exceed the entire resources of the International Monetary Fund, the institution set up at Bretton Woods to assist distressed countries needing access to foreign currency for their trade.

Meanwhile, the turmoil in the banking system has meant that entire countries - Iceland, Hungary, Pakistan and most of the poorer nations - can without warning lose all access to foreign currency to buy food for their populations. The answer is to increase the resources of the fund or some successor while recognising that the world has changed out of all recognition from 1944. The US is now a debtor, not a creditor, and the rich new powers of Asia need representation according to their wealth.

That leads to the final challenge of limiting the damage to the natural environment from the rapid expansion of trade and population in recent years. Even before the banks fell to bits, energy and grain markets, movements of people and climate patterns were frantically signalling that something was going awry with the worldwide commercial system.

At one level, the decline in business activity will be a blessing. Certain perverse projects, such as the expansion of the London airports, will not pay for themselves in the new world of tightened belts and shut wallets and must be delayed or even, God willing, abandoned. It is one of the bizarre features of our civilisation that money will do for its own preservation what we, for our own welfare, will not.

Here the conjunction of a new US administration and a disgraced business and financial Establishment is interesting, to put it mildly. If the investment, for example, necessary to limit or reduce carbon-dioxide emissions appeared to sceptics both uncertain and costly, the $3trn cost of cleaning up the current financial mess puts it into perspective. If some latter-day New Dealer is looking for counter-cyclical investment both to keep people in work and to raise public morale, the environment is by far the most promising field of activity. For example, the Detroit carmakers have jogged along for more than 80 years on a rich and combustive mixture of cheap gasoline and easy credit.

That era is now over, which is why the US motor industry is by almost every prudent measure utterly bust. There is no purpose in Barack Obama summoning from the tomb the corpse of Henry Ford. Any rescue operation in Detroit must take account of the new world of tighter credit and environmental standards and more costly motor spirit.

To concentrate merely on regulating the financial sector might buy stability for a year or two, but the weaknesses in energy and food supply and the degradation of the environment will not go away. The rainbow over the downtown skyscrapers will have but one meaning: no more water. The fire next time.

James Buchan is the author of "Frozen Desire: an Inquiry into the Meaning of Money" (1997). His latest novel, "The Gate of Air", is published by the MacLehose Press (14.99)

This article first appeared in the 17 November 2008 issue of the New Statesman, Obamania

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The French millennials marching behind Marine Le Pen

A Front National rally attracts former socialists with manicured beards, and a lesbian couple. 

“In 85 days, Marine will be President of the French Republic!” The 150-strong crowd cheered at the sound of the words. On stage, the speaker, the vice-president of the far-right Front National (FN), Florian Philippot, continued: “We will be told that it’s the apocalypse, by the same banks, media, politicians, who were telling the British that Brexit would be an immediate catastrophe.

"Well, they voted, and it’s not! The British are much better off than we are!” The applause grew louder and louder. 

I was in the medieval city of Metz, in a municipal hall near the banks of the Moselle River, a tributary of the Rhine from which the region takes its name. The German border lies 49km east; Luxembourg City is less than an hour’s drive away. This is the "Country of the Three Borders", equidistant from Strasbourg and Frankfurt, and French, German and French again after various wars. Yet for all that local history is deeply rooted in the wider European history, votes for the Front National rank among the highest nationally, and continue to rise at every poll. 

In rural Moselle, “Marine”, as the Front National leader Marine Le Pen is known, has an envoy. In 2014, the well-spoken, elite-educated Philippot, 35, ran for mayor in Forbach, a former miner’s town near the border. He lost to the Socialist candidate but has visited regularly since. Enough for the locals to call him “Florian".

I grew up in a small town, Saint-Avold, halfway between Metz and Forbach. When my grandfather was working in the then-prosperous coal mines, the Moselle region attracted many foreign workers. Many of my fellow schoolmates bore Italian and Polish surnames. But the last mine closed in 2004, and now, some of the immigrants’ grandchildren are voting for the National Front.

Returning, I can't help but wonder: How did my generation, born with the Maastricht treaty, end up turning to the Eurosceptic, hard right FN?

“We’ve seen what the other political parties do – it’s always the same. We must try something else," said Candice Bertrand, 23, She might not be part of the group asking Philippot for selfies, but she had voted FN at every election, and her family agreed. “My mum was a Communist, then voted for [Nicolas] Sarkozy, and now she votes FN. She’s come a long way.”  The way, it seemed, was political distrust.

Minutes earlier, Philippot had pleaded with the audience to talk to their relatives and neighbours. Bertrand had brought her girlfriend, Lola, whom she was trying to convince to vote FN.  Lola wouldn’t give her surname – her strongly left-wing family would “certainly not” like to know she was there. She herself had never voted.

This infuriated Bertrand. “Women have fought for the right to vote!” she declared. Daily chats with Bertrand and her family had warmed up Lola to voting Le Pen in the first round, although not yet in the second. “I’m scared of a major change,” she confided, looking lost. “It’s a bit too extreme.” Both were too young to remember 2002, when a presidential victory for the then-Front National leader Jean-Marie Le Pen, was only a few percentage points away.

Since then, under the leadership of his daughter, Marine, the FN has broken every record. But in this region, the FN’s success isn’t new. In 2002, when liberal France was shocked to see Le Pen reach the second round of the presidential election, the FN was already sailing in Moselle. Le Pen grabbed 23.7 per cent of the Moselle vote in the first round and 21.9 per cent in the second, compared to 16.9 per cent and 17.8 per cent nationally. 

The far-right vote in Moselle remained higher than the national average before skyrocketing in 2012. By then, the younger, softer-looking Marine had taken over the party. In that year, the FN won an astonishing 24.7 per cent of the Moselle vote, and 17.8 per cent nationwide.

For some people of my generation, the FN has already provided opportunities. With his manicured beard and chic suit, Emilien Noé still looks like the Young Socialist he was between 16 and 18 years old. But looks can be deceiving. “I have been disgusted by the internal politics at the Socialist Party, the lack of respect for the low-ranked campaigners," he told me. So instead, he stood as the FN’s youngest national candidate to become mayor in his village, Gosselming, in 2014. “I entered directly into action," he said. (He lost). Now, at just 21, Noé is the FN’s youth coordinator for Eastern France.

Metz, Creative Commons licence credit Morgaine

Next to him stood Kevin Pfeiffer, 27. He told me he used to believe in the Socialist ideal, too - in 2007, as a 17-year-old, he backed Ségolène Royal against Sarkozy. But he is now a FN local councillor and acts as the party's general co-ordinator in the region. Both Noé and Pfeiffer radiated a quiet self-confidence, the sort that such swift rises induces. They shared a deep respect for the young-achiever-in-chief: Philippot. “We’re young and we know we can have perspectives in this party without being a graduate of l’ENA,” said another activist, Olivier Musci, 24. (The elite school Ecole Nationale d’Administration, or ENA, is considered something of a mandatory finishing school for politicians. It counts Francois Hollande and Jacques Chirac among its alumni. Ironically, Philippot is one, too.)

“Florian” likes to say that the FN scores the highest among the young. “Today’s youth have not grown up in a left-right divide”, he told me when I asked why. “The big topics, for them, were Maastricht, 9/11, the Chinese competition, and now Brexit. They have grown up in a political world structured around two poles: globalism versus patriotism.” Notably, half his speech was dedicated to ridiculing the FN's most probably rival, the maverick centrist Emmanuel Macron. “It is a time of the nations. Macron is the opposite of that," Philippot declared. 

At the rally, the blue, red and white flame, the FN’s historic logo, was nowhere to be seen. Even the words “Front National” had deserted the posters, which were instead plastered with “in the name of the people” slogans beneath Marine’s name and large smile. But everyone wears a blue rose at the buttonhole. “It’s the synthesis between the left’s rose and the right’s blue colour”, Pfeiffer said. “The symbol of the impossible becoming possible.” So, neither left nor right? I ask, echoing Macron’s campaign appeal. “Or both left and right”, Pfeiffer answered with a grin.

This nationwide rebranding follows years of efforts to polish the party’s jackass image, forged by decades of xenophobic, racist and anti-Semitic declarations by Le Pen Sr. His daughter evicted him from the party in 2015.

Still, Le Pen’s main pledges revolve around the same issue her father obsessed over - immigration. The resources spent on "dealing with migrants" will, Le Pen promises, be redirected to address the concerns of "the French people". Unemployment, which has been hovering at 10 per cent for years, is very much one of them. Moselle's damaged job market is a booster for the FN - between 10 and 12 per cent of young people are unemployed.

Yet the two phenomena cannot always rationally be linked. The female FN supporters I met candidly admitted they drove from France to Luxembourg every day for work and, like many locals, often went shopping in Germany. Yet they hoped to see the candidate of “Frexit” enter the Elysee palace in May. “We've never had problems to work in Luxembourg. Why would that change?” asked Bertrand. (Le Pen's “144 campaign pledges” promise frontier workers “special measures” to cross the border once out of the Schengen area, which sounds very much like the concept of the Schengen area itself.)

Grégoire Laloux, 21, studied history at the University of Metz. He didn't believe in the European Union. “Countries have their own interests. There are people, but no European people,” he said. “Marine is different because she defends patriotism, sovereignty, French greatness and French history.” He compared Le Pen to Richelieu, the cardinal who made Louis XIV's absolute monarchy possible:  “She, too, wants to build a modern state.”

French populists are quick to link the country's current problems to immigration, and these FN supporters were no exception. “With 7m poor and unemployed, we can't accept all the world's misery,” Olivier Musci, 24, a grandchild of Polish and Italian immigrants, told me. “Those we welcome must serve the country and be proud to be here.”

Lola echoed this call for more assimilation. “At our shopping centre, everyone speaks Arabic now," she said. "People have spat on us, thrown pebbles at us because we're lesbians. But I'm in my country and I have the right to do what I want.” When I asked if the people who attacked them were migrants, she was not so sure. “Let's say, they weren't white.”

Trump promised to “Make America Great Again”. To where would Le Pen's France return? Would it be sovereign again? White again? French again? Ruled by absolutism again? She has blurred enough lines to seduce voters her father never could – the young, the gay, the left-wingers. At the end of his speech, under the rebranded banners, Philippot invited the audience to sing La Marseillaise with him. And in one voice they did: “To arms citizens! Form your battalions! March, march, let impure blood, water our furrows...” The song is the same as the one I knew growing up. But it seemed to me, this time, a more sinister tune.