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Laughing all the way to the bank

It’s hard to know what is more irrelevant – the report of the Independent Commission on Banking or Ed Miliband’s call for a code of conduct which will allow bankers to be struck off in the same way as doctors.

Let’s talk about the official Vickers report, which today recommends that the banks build a wall between their traditional high street operations and the place where all the profits lie – the global, speculative money markets.

Make them separate operations, the argument goes, and the state will never again have to bail out and effectively nationalise many banks as it did in 2008/9 when the global financial system went into melt-down (NB: triggered by the collapse of Lehman Brothers, which was an investment bank).

If Vickers’ proposals were a solution – and they patently aren’t – the state would surely act immediately because the crisis is far from over. Instead, any changes are unlikely to be effective before 2019! The Vickers report makes cosmetic surgery look good.

British banks are sitting on countless billions of worthless Greek and other sovereign debt. They are not lending because their balance sheets are stuffed full of “non-performing” assets – bad debts to you and me.

Of course, none of these banks are truly “British” but parts of a globalised system that, particularly in Europe, is staggering from pillar to post. As the American economist Paul Krug noted over the weekend:

Financial turmoil in Europe is no longer a problem of small, peripheral economies like Greece. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat… And now it’s all coming to a head. We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer.

Krugman, however, along with many other economists, mistakenly believes this what we are living through is predominantly a financial crisis in which a misplaced emphasis on debt has overwhelmed economies and prevented a “return to growth”.

In truth, the financial system’s exponential growth was a state-encouraged response to a global economy that could only expand through pumping unlimited amounts of credit into the hands of consumers, corporations and governments.

Deregulation of banking, which accelerated from the late 1990s onwards, was not a cause but a consequence of globalisation itself. The production of commodities expanded so rapidly that there way no way consumers could buy them without credit. And when the price of homes got out of reach, people were lent more than they could ever afford to repay.

With money sloshing around global markets, it was no surprise that banks developed ever more creative ways of making profits with a range of exotic “products” like credit default swaps. But even these depended on some consumer somewhere along the line making interest payments. And when some US homeowners began to default in 2007, the financial system began its unravelling, which continues.

By the time of the crash, global financial assets were reckoned to be 4.5 times the value of the real economy. Measures that include derivatives increase the ratio to 10 and more times. Some observers like Market Oracle believe that less than half of the debt in the system still has to be accounted for.

Denied unlimited credit, the productive economy has gone into free fall and is heading for outright depression. The savage attack on living standards in Britain reported today by the Institute for Fiscal Studies – while bosses’ pay soars – is capitalism’s response.

In this context, striking off a banker for bad behaviour as Labour leader Miliband suggests, has got to be the feeblest idea of them all! The system as a whole is broken, unsustainable and needs replacing. Democratically-owned and controlled banks and corporations, run along not-for-profit lines, beckons. How to achieve this is another debate. What’s the alternative?

Paul Feldman
Communications editor
12 September 2011

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