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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

MARTIN O’NEILL
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The new young fogeys

Today’s teens and twentysomethings seem reluctant to get drunk, smoke cigarettes or have sex. Is abstinence the new form of youth rebellion?

In a University College London lecture theatre, all eyes are on an elaborate Dutch apple cake. Those at the back have stood up to get a better look. This, a chorus of oohs and aahs informs me, is a baked good at its most thrilling.

In case you were wondering, UCL hasn’t rented out a room to the Women’s Institute. All thirty or so cake enthusiasts here are undergraduates, aged between 18 and 21. At the third meeting this academic year of UCL’s baking society, the focus has shifted to a Tupperware container full of peanut butter cookies. One by one, the students are delivering a brief spiel about what they have baked and why.

Sarah, a 19-year-old human sciences undergraduate, and Georgina, aged 20, who is studying maths and physics, help run the baking society. They tell me that the group, which was set up in 2012, is more popular than ever. At the most recent freshers’ fair, more than 750 students signed up. To put the number in perspective: that is roughly 15 per cent of the entire first-year population. The society’s events range from Great British Bake Off-inspired challenges to “bring your own cake” gatherings, such as today’s. A “cake crawl”, I am told, is in the pipeline. You know, like a pub crawl . . . but with cake? Georgina says that this is the first year the students’ union has advertised specifically non-drinking events.

From the cupcake boom to the chart-topping eminence of the bow-tie-wearing, banjo-plucking bores Mumford & Sons, the past decade of youth culture has been permeated by wholesomeness. According to the Office for National Statistics (ONS), this movement is more than just aesthetic. Not only are teenage pregnancies at their lowest level since records began in the 1960s, but drug-taking, binge drinking and sexually transmitted infections among young people have also taken significant dives. Drug use among the under-25s has fallen by a quarter over the past ten years and heavy drinking – measured by how much a person drinks in an average week – is down by 15 per cent. Cigarettes are also losing their appeal, with under-25 smokers down by 10 per cent since 2001. Idealistic baby boomers had weed and acid. Disaffected and hedonistic Generation X-ers had Ecstasy and cocaine. Today’s youth (which straddles Generations Y and Z) have cake. So, what shaped this demographic that, fairly or otherwise, could be called “Generation Zzzz”?

“We’re a lot more cynical than other generations,” says Lucy, a 21-year-old pharmacy student who bakes a mean Welsh cake. “We were told that if we went to a good uni and got a good job, we’d be fine. But now we’re all so scared we’re going to be worse off than our parents that we’re thinking, ‘Is that how we should be spending our time?’”

“That” is binge drinking. Fittingly, Lucy’s dad – she tells me – was an anarchist with a Mohawk who, back home in the Welsh valleys, was known to the police. She talks with deserved pride about how he joined the Conservative Party just to make trouble and sip champagne courtesy of his enemies. Lucy, though decidedly Mohawk-free, is just as politically aware as her father. She is concerned that she will soon graduate into a “real world” that is particularly hard on women.

“Women used to be a lot more reliant on men,” she says, “but it’s all on our shoulders now. One wage isn’t enough to support a family any more. Even two wages struggle.”

***

It seems no coincidence that the downturn in drink and drugs has happened at the same time as the worst financial crisis since the Great Depression. Could growing anxiety about the future, combined with a dip in disposable income, be taming the under-25s?

“I don’t know many people who choose drugs and alcohol over work,” says Tristan, a second-year natural scientist. He is one of about three men at the meeting and it is clear that even though baking has transcended age it has yet to transcend gender to the same extent. He is softly spoken and it is hard to hear him above a room full of sugar-addled youths. “I’ve been out once, maybe, in the past month,” he says.

“I actually thought binge drinking was quite a big deal for our generation,” says Tegan, a 19-year-old first-year linguistics undergraduate, “but personally I’m not into that. I’ve only been here three weeks and I can barely keep up with the workload.”

Tegan may consider her drinking habits unusual for someone her age but statistically they aren’t. Over a quarter of the under-25s are teetotal. Neither Tegan nor Lucy is dull. They are smart, witty and engaging. They are also enthusiastic and seemingly quite focused on work. It is this “get involved” attitude, perhaps, that distinguishes their generation from others.

In Absolutely Fabulous, one of the most popular British sitcoms of the 1990s, a lot of the humour stems from the relationship between the shallow and fashion-obsessed PR agent Edina Monsoon and her shockingly straitlaced teenage daughter, Saffie. Although Saffie belongs to Generation X, she is its antithesis: she is hard-working, moral, politically engaged, anti-drugs and prudishly anti-sex. By the standards of the 1990s, she is a hilarious anomaly. Had Ab Fab been written in the past couple of years, her character perhaps would have been considered too normal. Even her nerdy round glasses and frumpy knitted sweaters would have been considered pretty fashionable by today’s geek-chic standards.

Back in the UCL lecture theatre, four young women are “geeking out”. Between mouthfuls of cake, they are discussing, with palpable excitement, a Harry Potter-themed summer camp in Italy. “They play Quidditch and everything – there’s even a Sorting Hat,” says the tall, blonde student who is leading the conversation.

“This is for children, right?” I butt in.

“No!” she says. “The minimum age is actually 15.”

A kids’ book about wizards isn’t the only unlikely source of entertainment for this group of undergraduates. The consensus among all the students I speak to is that baking has become so popular with their demographic because of The Great British Bake Off. Who knew that Mary Berry’s chintzy cardigans and Sue Perkins’s endless puns were so appealing to the young?

Are the social and economic strains on young people today driving them towards escapism at its most gentle? Animal onesies, adult ball pools (one opened in west London last year) and that much-derided cereal café in Shoreditch, in the East End, all seem to make up a gigantic soft-play area for a generation immobilised by anxiety.

Emma, a 24-year-old graduate with whom I chatted on email, agrees. “It feels like everyone is more stressed and nervous,” she says. “It seems a particularly telling sign of the times that adult colouring-in books and little, cutesy books on mindfulness are such a massive thing right now. There are rows upon rows of bookshelves dedicated solely to all that . . . stuff.” Emma would know – she works for Waterstones.

From adult colouring books to knitting (UCL also has a knitting society, as do Bristol, Durham, Manchester and many more universities), it is hard to tell whether the tsunami of tweeness that has engulfed middle-class youth culture in the past few years is a symptom or a cause of the shrinking interest in drugs, alcohol, smoking and other “risk-taking” behaviours.

***

Christine Griffin is Professor of Social Psychology at Bath University. For the past ten years, she has been involved in research projects on alcohol consumption among 18-to-25-year-olds. She cites the recession as a possible cause of alcohol’s declining appeal, but notes that it is only part of the story. “There seems to be some sort of polarisation going on,” Griffin says. “Some young people are actually drinking more, while others are drinking less or abstaining.

“There are several different things going on but it’s clear that the culture of 18-to-25-year-olds going out to get really drunk hasn’t gone away. That’s still a pervasive social norm, even if more young people are drinking less or abstaining.”

Griffin suggests that while frequent, sustained drinking among young people is in decline, binge drinking is still happening – in short bursts.

“There are still a lot of people going to music festivals, where a huge amount of drinking and drug use goes on in a fairly unregulated way,” she says. It is possible that music festivals and holidays abroad (of the kind depicted in Channel 4 programmes such as What Happens in Kavos, in which British teenagers leave Greek islands drenched in booze and other bodily fluids) are seen as opportunities to make a complete escape from everyday life. An entire year’s worth of drinking, drug-taking and sex can be condensed into a week, or even a weekend, before young people return to a life centred around hard work.

Richard De Visser, a reader in psychology at Sussex University, also lists the economy as a possible cause for the supposed tameness of the under-25s. Like Griffin, however, he believes that the development is too complex to be pinned purely on a lack of disposable income. Both Griffin and De Visser mention that, as Britain has become more ethnically diverse, people who do not drink for religious or cultural reasons – Muslims, for instance – have become more visible. This visibility, De Visser suggests, is breaking down taboos and allowing non-mainstream behaviours, such as not drinking, to become more socially accepted.

“There’s just more variety,” he says. “My eldest son, who’s about to turn 14, has conversations – about sexuality, for example – that I never would’ve had at his age. I think there’s more awareness of alcohol-related problems and addiction, too.”

De Visser also mentions the importance of self-image and reputation to many of the young non-drinkers to whom he has spoken. These factors, he argues, are likely to be more important to people than the long-term effects of heavy drinking. “One girl I interviewed said she wouldn’t want to meet the drunk version of herself.”

Jess, a self-described “granny”, is similarly wary of alcohol. The 20-year-old Liverpudlian, who works in marketing, makes a bold claim for someone her age. “I’ve never really been drunk,” she says. “I’ve just never really been bothered with alcohol or drugs.” Ironically, someone of her generation, according to ONS statistics, is far more likely to be teetotal than a real granny at any point in her life. Jess says she enjoys socialising but her nights out with close friends are rather tame – more likely to involve dinner and one quick drink than several tequila shots and a traffic cone.

It is possible, she suggests, that her lack of interest in binge drinking, or even getting a little tipsy, has something to do with her work ethic. “There’s a lot more competition now,” she says. “I don’t have a degree and I’m conscious of the need to be on top of my game to compete with people who do. There’s a shortage of jobs even for people who do have degrees.”

Furthermore, Jess says that many of her interactions with friends involve social media. One theory put forward to explain Generation Zzzz is that pubs are losing business to Facebook and Twitter as more and more socialising happens online. Why tell someone in person that you “like” their baby, or cat, or new job (probably over an expensive pint), when you can do so from your sofa, at the click of a button?

Hannah, aged 22, isn’t so sure. She recently started her own social media and communications business and believes that money, or the lack of it, is why her peers are staying in. “Going out is so expensive,” she says, “especially at university. You can’t spend out on alcohol, then expect to pay rent and fees.” Like Jess (and as you would probably expect of a 22-year-old who runs a business), Hannah has a strong work ethic. She also has no particular interest in getting wasted. “I’ve always wanted my own business, so for me everything else was just a distraction,” she says. “Our generation is aware it’s going to be a bit harder for us, and if you want to support yourself you have to work for it.” She also suggests that, these days, people around her age have more entrepreneurial role models.

I wonder if Hannah, as a young businesswoman, has been inspired by the nascent strand of free-market, “lean in” feminism. Although the women’s movement used to align itself more with socialism (and still does, from time to time), it is possible that a 21st-century wave of disciples of Sheryl Sandberg, Facebook’s chief operating officer, is forswearing booze, drugs and any remote risk of getting pregnant, in order to get ahead in business.

But more about sex. Do the apparently lower rates of sexually transmitted infections and teenage pregnancies suggest that young people are having less of it? In the age of Tinder, when hooking up with a stranger can be as easy as ordering a pizza, this seems unlikely. Joe Head is a youth worker who has been advising 12-to-21-year-olds in the Leighton Buzzard area of Bedfordshire on sexual health (among other things) for 15 years. Within this period, Head says, the government has put substantial resources into tackling drug use and teen pregnancy. Much of this is the result of the Blair government’s Every Child Matters (ECM) initiative of 2003, which was directed at improving the health and well-being of children and young adults.

“ECM gave social services a clearer framework to access funds for specific work around sexual health and safety,” he says. “It also became a lot easier to access immediate information on drugs, alcohol and sexual health via the internet.”

***

Head also mentions government-funded education services such as Frank – the cleverly branded “down with the kids” anti-drugs programme responsible for those “Talk to Frank” television adverts. (Remember the one showing bags of cocaine being removed from a dead dog and voiced by David Mitchell?)

But Head believes that the ways in which some statistics are gathered may account for the apparent drop in STIs. He refers to a particular campaign from about five years ago in which young people were asked to take a test for chlamydia, whether they were sexually active or not. “A lot of young people I worked with said they did multiple chlamydia tests throughout the month,” he says. The implication is that various agencies were competing for the best results in order to prove that their education programmes had been effective.

However, regardless of whether govern­ment agencies have been gaming the STI statistics, sex education has improved significantly over the past decade. Luke, a 22-year-old hospital worker (and self-described “boring bastard”), says that sex education at school played a “massive part” in his safety-conscious attitude. “My mother was always very open [about sex], as was my father,” he says. “I remember talking to my dad at 16 about my first serious girlfriend – I had already had sex with her by this point – and him giving me the advice, ‘Don’t get her pregnant. Just stick to fingering.’” I suspect that not all parents of millennials are as frank as Luke’s, but teenagers having sex is no longer taboo.

Luke’s attitude towards drugs encapsulates the Generation Zzzz ethos beautifully: although he has taken MDMA, he “researched” it beforehand. It is this lack of spontaneity that has shaped a generation of young fogeys. This cohort of grannies and boring bastards, of perpetual renters and jobseekers in an economy wrecked by less cautious generations, is one that has been tamed by anxiety and fear.

Eleanor Margolis is a freelance journalist, whose "Lez Miserable" column appears weekly on the New Statesman website.

This article first appeared in the 05 February 2015 issue of the New Statesman, Putin's war