It’s not often one agrees with the Institute of Directors (IoD), but on this occasion they are right (as far as it goes) to say: “It is high time for a clear-out of the leaders who created this mess, and the should be replaced with new blood”. From the IoD’s point of view no doubt this would be a good example of capitalism’s vaunted ‘creative destruction’ – getting rid of Bob (Greed Personified) Diamond and all the other arrogant and self-interested gamblers who have done so much damage to the public purse and to public confidence. But it’s not just some rotten apples who should be got rid of, it’s the financial system itself which has irretrievably broken down. There are several steps that should now urgently be taken.
1) All the big banks should be broken up
They do not serve the interests of Britain since their lending to businesses is extraordinarily low and they prefer to focus instead on property mortgages, overseas speculation, and tax avoidance on an industrial scale. Britain needs, not just a complete separation of retail from investment banking, as under the Glass Steagall Act which worked successfully for 66 years till repealed which then led within 8 years to catastrophic breakdown. Britain needs much smaller specialist banks focusing on, inter alia, infrastructure, knowledge and R&D, green economy, regional relational banking with industry, housebuilding, etc.
2) The banks don’t at present prioritise the national interest
The money supply which was privatised by the deregulation of the Thatcher, Blair and Brown years should be brought back under public control. The banks currently lend about £7 trillions (5 times the entire UK GDP) which is allocated overwhelmingly to areas of high profit (property, derivatives, scams like the present one on mis-selling the hedging of credit swaps, aggressive and abusive tax avoidance) which are also high risk, but underwritten by the implicit taxpayer guarantee. Regaining control of the money supply would instead allow the financial system to be geared primarily to Britain’s real priorities – industry and exports (i.e. reversing Britain’s unsustainable £100bn a year deficit in traded goods).
3) The regulatory system has abjectly failed
This happened because the politicians (Thatcher, Blair and Brown again) instilled a regulation-lite culture. The mis-selling scam has been going on since 2005, and it has taken 7 years to come to a head – with the US, not the UK, in the lead. The Tories have made a great song and dance about reversing the Brown/Balls’ FSA innovation and transferring regulation back to the Bank of England. But the point is not where regulation is located, but how extensive and effective the powers are and how rigorously they are exercised. The US Securities and Exchange Commission (SEC) does a far better job than any UK device. We should have a UK SEC with the powers to match.