As the UK banking sector is heading towards another self inflicted crisis, and politician’s jockey about who is most to blame for the mess, how can we learn from the failure to change the finance system in the aftermath of 2008? The answer is to move far more quickly to a debate about the solutions and not dwell on the minutiae of the problems. We can all agree that the finance system, characterized by short-termism, rent-seeking, secrecy, conflicts of interest, cartels, and now open corruption, is broken and needs transforming in one with more transparency, democracy, co-operation, long termism, competition and diversity. The question is how to get there from here.
The good news is there are now lots of innovative policy ideas out there for how to disrupt the existing system in a way that could truly transform into something that served the public good. The Finance Lab has mapped some of these ideas and attempted to chart their progress from a glint in the eye to a genuine political battleground.
If you like you government actions to force change on the system from the top down, then they should be applying the Glass-Steagall Act principles to the UK and completely separate the retail functions from investment banks. The government is arguing that by implementing the Vickers Commission compromise recommendation of ringfencing, they are already doing this. But, as City veteran Terry Smith has eloquently argued, ringfences don’t work.
Then there are the calls from Anne Pettifor, Richard Werner and others to reinstate some form of controls on credit allocation across the whole banking sector. Central banks used to do this all the time in 1950s-1970s. Japan built its economic miracle in part by stopping their banks lending excessively for speculation and property, but steering the credit into productive investment which generated economic growth and jobs. 75% of lending from Britain’s banks goes on speculation or property.
Not everyone likes big government any more than they like big banks, so how about the ideas being promoted to cultivate new and alternative finance mechanisms, like peer to peer lending, credit unions, new retail banks and local savings banks. These new entrants, which could ultimately provide serious competition to the big five banks, face many regulatory and market barriers at the moment.
Amendments are being tabled to the Financial Services Bill to try and rectify this. Baroness Kramer and others are leading the fight. Others, like Civitas, New Economics Foundation and Compass, have been extolling the many virtues of the German banking system, with its layer of local savings banks, held by trusts and only able to lend within a restricted geographic area.
For those who think that such bottom up solutions will take too long, there is another strand of thinking which is about engaging the mainstream finance industry with new tools to steer investment, in particular, in a more long term direction. The creation of a state investment bank, along the lines of KfW in Germany, or any other European country for that matter, would create a new City institution which would devote its balance sheet to productive investment, and long term value creation. If the newly created Green Investment Bank were allowed to borrow, then it could do this job, ultimately issuing green or infrastructure bonds to attract pension fund money.Al these ideas, and their many advocates, have been waiting in the wings for another crisis to open up the political space for disruptive, transformative policy ideas to be taken up. Could that time be arriving again? If it has, let’s grasp it more firmly than was the case in 2008.
Tags: 2008 crisis , banking sector , corruption , economic recovery , financial crisis , fiscal stimulus , global imbalances , inflation , investment bank , retail bank , transparency , UK