Bashing the bankers will make you go blind
Everyone’s enjoying the two-minute hate against greedy bankers, but it is obscuring a proper, truthful understanding of the recession.
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‘Without a coherent strategy, even the best tactics are futile: casualties just mount.’ That was the diagnosis of the problems facing the British army in Afghanistan, given by a former soldier in The Times (London) on Tuesday this week. He could just as easily have been talking about the New Labour government’s handling of the British economy.
The prime minister, Gordon Brown, has apparently been winning plaudits (or at least, imitators) around the world for his approach to the financial crisis. But while a complete financial meltdown may have been averted, it is becoming increasingly apparent that the wider economy is facing a serious downturn over the short to medium term. Schools minister Ed Balls caused consternation among his cabinet colleagues this week with his suggestion that ‘this is becoming the most serious global recession for, I’m sure, over 100 years’, with events moving at a ‘speed, pace and ferocity which none of us have seen before’.
The trouble is that there is little indication that those at the top of British society have any vision of how the economy should look in the future. They simply want the current mess to go away. In other words, they are all ‘tactics’ and no ‘strategy’. Without a coherent understanding of what has happened, and why, public discussion has descended into a shallow and unhelpful blame game. Back in September, the targets were the ‘short sellers’ who were betting on bank share prices tumbling; now the targets are the very well-paid executives of the banks, who this week have been grilled by MPs, demonised in the media, and labelled as ‘stupid and greedy’ by an ostensibly objective TV news presenter.
Understanding the recession
The downturn is the consequence of years in which productive activity in developed Western economies like America’s and Britain’s has faltered, while production has taken off in the east. In the search for profits, an ever-greater slice of Western economic activity has been taken up with shifting other people’s money around, with the search for bigger returns driving companies to more dubious outlets, like the sub-prime mortgage market. Even non-financial companies have generated a substantial portion of their profits from financial activities. The British and US governments, in particular, have been only too happy to encourage this process by adopting cheap credit policies, with interest rates at historic lows, enabled and encouraged by a generous supply of funds emanating from developing economies, in particular China.
In the UK, this weak productive economy has also been propped up by government spending. The graph below shows how, even allowing for inflation, the amount that governments have spent in the UK has rocketed over the past 100 years. While recent bailouts for the banks have sparked considerable controversy, there is actually nothing new about the government propping up the private sector or taking on responsibility for functions that have become unprofitable, but which are vital to the running of the wider economy.
UK public spending, 1900-2007, at 2003 prices
source: UKpublicspending.co.uk
A balanced view of the current crisis would conclude that a recession of some description has been brewing for some time, even if the proximate cause of the downturn has been the recklessness displayed by both financiers and ministers. Bankers believed that dodgy loans could be turned to gold through the magic of complex financial instruments; ministers assumed that the City of London and Wall Street would continue to lay golden eggs in perpetuity.
Finding a suitable scapegoat
A clear analysis of what has happened is necessary so that decisive action can be taken to minimise the damage. However, over the past few weeks, discussion of the recession has been reduced to a simple game of Kick the Bankers, given focus by the grilling of four senior bankers by the House of Commons treasury select committee this week.
Admittedly, the bosses of Britain’s troubled banks have hardly gone out of their way to assuage public opinion, taking handsome pay-offs, dishing out bonuses and accepting enormous salaries from the very institutions they helped to screw up. The chief executive of Royal Bank of Scotland (RBS), Sir Fred Goodwin, left with a £20million pay-off, despite having brought the bank to its knees. Then, RBS announced it would be paying out £1billion in bonuses to staff – despite being saved from insolvency by the government, which now owns 68 per cent of its shares. And when giving evidence to the treasury select committee, a former chief executive of Halifax Bank of Scotland (HBOS), Andy Hornby, admitted he was currently receiving £60,000 per month from his former employers for ‘consultancy’.
It is galling to hear of such payouts when hundreds of thousands of people have been losing their jobs and relatively viable businesses have folded for want of access to credit. For example, the celebrity chef, Antony Worrall Thompson, has received considerable publicity in the past few days after announcing that four of his restaurants are to close. Even though the restaurants were in reasonably good shape, he claimed, his company couldn’t get even the relatively small amount of finance to see them through a quiet trading period. ‘It makes me cry. It is just appalling. I am furious, to be honest, that the banks didn’t support me’, he said.
The letters pages and phone-in shows have been filled with angry complaints that bonuses should never have been paid to people who were lucky to have jobs at all, the banks they work for having been saved by the government taking on enormous liabilities. Some have even demanded prosecutions of top bankers, and in a phone-in show on BBC Radio 5 a caller said the bankers should be ‘executed’, not rewarded – they should be ‘hanged with their own collaterals’. There have been endless debates about ‘bonus culture’, too, and fevered discussion of the social psychology of bankers who were paid ever-spiralling rewards as their profits poured in, despite question marks over the manner in which the profits were made.
Responsibility avoidance
Such debates miss the point. As the Financial Services Authority (FSA), the quango that regulates the UK financial industry, revealed yesterday – no doubt in an attempt to cover its back – it wrote to HBOS in 2002 about ‘a need to strengthen the control infrastructure within the group’ and in 2006 warned the bank that ‘the growth strategy of the group posed risks to the whole group and that these risks must be managed and mitigated’. If the FSA is to believed, there were clear problems identified at a major bank almost seven years ago.
Yet the UK government had long since decided that monetary policy and financial regulation should be removed from political influence. Labour’s first move after being elected was to give the Bank of England independence from government control. The message was ‘we don’t do the economy anymore’, even if the reality was a proliferation of development agencies and outsourcing to provide a crutch for business.
The Labour government has had close relations with the very bankers who are now being pilloried. Only yesterday, Sir James Crosby, another former chief executive of HBOS, was forced to resign his post as deputy chairman of the FSA after allegations that he ignored or even suppressed internal criticism of HBOS’s risky trading strategy. He had been appointed to the FSA by Gordon Brown. According to Iain Martin, writing in his Telegraph blog yesterday, Crosby was Brown’s ‘favourite banker’ while former RBS boss Sir Fred Goodwin was on very good terms with Brown’s predecessor, Tony Blair. Indeed, Blair and Brown’s ‘prawn cocktail offensive’ to win over the leading figures of British finance in the 1990s is widely seen as a major factor in Labour coming to power in 1997.
But Brown has been doing his best to distance himself from his former friends for months. In October, he told viewers of the breakfast TV show, GMTV: ‘I’m angry too. I am angry at irresponsible behaviour… Our economy is built around people who work hard, who show effort, who take responsible decisions, and whether there is excessive and irresponsible risk-taking, that has got to be punished.’ At best, Brown utterly failed to prevent this ‘irresponsible risk-taking’; more likely, he was only too content to benefit from it as increased financial risk-taking became intertwined with the real economy itself.
What’s wrong with a little greed?
This scapegoating debate prevents a proper discussion of our current predicament, and it lets the politicians who presided over this mess off the hook. Even worse, it turns the problem into one of ‘human greed’. While the pay packets of top bankers are jaw-dropping to the rest of us, turning the crisis into a morality play chimes with a wider discussion about how humanity’s greedy desire for betterment is screwing up everything. From the inadequate parenting skills of ambitious, selfish working mothers, to the undermining of community in the name of a materialistic individualism, to the destruction of the environment in the constant drive for economic growth, the desire to live a more comfortable life is being re-presented as a rapacious destruction of anything worthwhile. Oh the irony, it is suggested: now, this greed has even ruined the economy itself. There is a thin line between attacking greedy bankers and slamming a broader ‘culture of greed’, in which all of us – from the working mum to 4×4-driving local businessman – is implicated. Much of the criticism of bankers, in particular from MPs and the mainstream media, is driven by a moralistic disdain for ambition itself.
It is vital for society to work out what’s gone wrong. Some commentators present each economic crisis as a standalone event, a series of unrelated ‘bubbles’ and ‘shocks’; others would have us believe that this boom-bust pattern is a product of inherent flaws in human psychology, of greed combined with ‘herd instincts’. But what we really need to ask is: why is a dynamic and sometimes successful social system – capitalism – ultimately unable to increase human wealth in a reliable way? Perhaps more importantly: is there a better way of doing things?
Now is the time to put politics back into economics. And these pointless and superficial blame games will only get in the way of that.
Rob Lyons is deputy editor of spiked.
Why rate cuts stir so little interest, by Mick Hume
The Crisis With No Name, by Frank Furedi
The ‘credit crunch’ and the SAD economy, by Phil Mullan
The state won’t be the saviour of the economy, by Frank Furedi
I don’t predict a riot, by Mick Hume
This Marxist isn’t laughing, by Brendan O’Neill
Against austerity, by Brendan O’Neill
There Is (still) No Alternative, by Mick Hume
Congress bales out, by Brendan O’Neill
Scapegoating the spivs, by Tim Black
It’s the politics, stupid, by Phil Mullan
Lehman Brothers: when confidence runs out, by Rob Lyons
Five myths about the Wall Street crisis, by Daniel Ben-Ami
Read more at spiked issue: Financial Crisis.
To enquire about republishing spiked’s content, a right to reply or to request a correction, please contact the managing editor, Viv Regan.
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