Politics
The banks need the state's help - so they should abide by its rules
Published 01 May 2008
The unfettered market has shown itself to be hugely imperfect. The true logic is that bankers should become paupers
If the bank crisis weren't so ugly, there would be something comical in the call by the shadow chancellor, George Osborne, for greater controls on trade unions as a matter of "urgency" just as the Financial Services Authority was confessing it had failed in its duty to the customers of the collapsing Northern Rock. The expurgated account of this confession reveals error after error, including the FSA's failure to insist that the Rock inform shareholders of its imminent collapse. The end victims of that omission have been us, the taxpayers, left with a potential liability of £100bn following the Rock's nationalisation. Meanwhile, in time-honoured fashion, the man who oversaw the collapse of his bank walked off with a £750,000 pay-off.
We have quickly learned that the banking world operates virtually without regulation; the FSA's report, while apparently owning up to laxity of supervision, does not inspire confidence in the FSA's belief in transparency. Three of the "danger signals" missed by the regulators remain "classified": too sensitive for the de facto owners - us - to be told of. Another missed danger signal was the bank's easy-to-spot lie in 2007 that the Rock had "excess capital" that it intended to hand out to shareholders. This remained unchallenged and unreported by the FSA.
Since then, with the collapse in the share prices of high-street banks such as RBS and HBOS, the taxpayers' rescue effort under the Bank of England's Special Liquidity Scheme looks likely to run into tens of billions more. And yet we hear no talk from George Osborne (or from Labour's front benches, come to that) of the urgency of toughening up the legislation controlling British financial institutions.
As Iain Macwhirter observes on page 22, such regulators as we have - the FSA and the Bank of England - have been asleep at the wheel. Their civil servants, charged with ensuring that the banks observe elementary rules of honesty and transparency, have, dazzled by the wealth and lifestyle of the financiers they are meant to monitor, allowed them to deal in dodgy loans to would-be housebuyers on the deluded basis that house prices could only ever go up. When these bad debts were packaged up - "securitised" - into interest-bearing bonds, regulators and banks alike colluded in the fantasy that the debts had been safely passed on. But the debts came winging back in similar "securitised" bundles. Now no one trusts anyone and the entire financial system has seized up. We are left with neither the face-to-face trust of earlier, more innocent banking days, nor with regulators sufficiently robust to deal with the dizzying transactions of today's international finance houses.
As the banks line up for the Bank of England's special reserve, it is time to admit that the unfettered market has shown itself to be worryingly imperfect. The true logic of the free market that has served bonus-greedy bankers so well is that heads should roll and chief executives become paupers. We know that won't happen. Instead, the best-known banks on the high street are benefiting from the biggest state rescue in history. Taxpayers deserve something back. While the banks are enjoying the embrace of the state, it is time to change the rules.
Instead of merely propping up the banks for fear of widespread collapse, the government could, as Macwhirter suggests, start democratising them, using their assets to stimulate the economy - for example, in public housing (without firm intervention, Gordon Brown's private housebuilding programme will be in trouble).
For some thirty years, a debt culture flourished in private corporations while the debts of governments were considered intolerable, a policy assiduously policed by international agencies such as the IMF (which also energetically protected the freedoms of the private sector). But the bank crisis has left this neoliberal orthodoxy with no intellectual credibility.
This could and should be a turning point in public policy, starting with an immediate invigoration of the regulatory system and a commitment to both a financial system and a fiscal policy that work in the interests of the economy as a whole.
Follow Sir Simon's beat
Bravo to Sir Simon Rattle, who has just won an encore from the Berlin Philharmonic Orchestra after a vote threatened to end his tenure as chief conductor. Some musicians wanted him gone after he announced his programme for 2009. Performances of Stockhausen and Messiaen in a disused airport hangar, they felt, were too far a cry from the Brahms and Bruckner for which the Berlin Phil is famed.
But Rattle has won, ending the war that burst into the open two years ago when critics accused him of "blithely diversifying instead of specialising" and wrecking the orchestra's sound.
We should be proud that a Briton has retained the most prestigious job in classical music. Proud, too, that he has done so not by the easy route of endlessly burnishing the great 19th-century set pieces. Instead, Rattle challenged one of Europe's most admired (and conservative) cultural institutions to be bolder, more innovative, and eventually persuaded it to follow.
Rattle's is an example British politicians could learn from. Still they attempt to stand one foot in, one foot out of the EU - an approach that resulted in the government's fumbling display at the Lisbon Summit last year - whereas the reality is that our path lies within the European Union, whatever we think about it. Like it or not, change can only come from within. Shaping the EU's future requires engagement and daring of the kind Maestro Rattle has demonstrated. Time for our MPs to step up to the podium.
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