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So there won’t be another crash?

Gordon Brown and patriotic LabourIt’s not often I agree with Gordon Brown – indeed I can’t remember the last time I do so – but I think he may be right when he predicted earlier this month that the global economy may be heading for another meltdown. He said, rightly in my view, that the lessons of the 2007-9 financial and economic crisis have still not yet been properly addressed. Perhaps the the most important of these is the continued growth of the unregulated shadow banking system. It is worrying that insurers and pension companies as well as other financial sub-sectors like asset managers and hedge funds are now part of this shadow system and are seeking to fill the vacuum left by the shrinking banks.

In this switch away from plain old under-writing AIG was a pioneer, and its huge collapse should set the alarm bells ringing. To be fair, the Financial Stability Board has recently included 9 insurers among its list of globally systemic financial institutions that should be closely monitored and held to higher levels of capital adequacy. But is it enough merely to note the problems? What action is being taken to head off another crash rather than pick up the bits again afterwards?

Then there is the withdrawal of central banks’ massive doses of quantitative easing, begun very gingerly by Ben Bernanke in the US last month after several previous false starts. Will the gradual but steady withdrawal of QE, to which the financial system had become addicted after the 2008 crash, disturb the fragility of the financial (but not yet economic) recovery, particularly the fast-growing but relatively unwatched shadow banking sector? And even more important, what impact will this deleveraging of financial subsidies have on business investment, economic growth and employment levels?

Then there is the rather smug arrogance in the UK’s own inner finance sanctum that the government’s new Banking Bill has cracked (probably an unwise metaphor) the problems of past excesses. It certainly hasn’t. Capital reserve ratios at 3% are still far too low in the opinion of many financial experts, and should be nearer 10%, and anyway are not being enforced till 2019! The Vickders’ Chinese walls between the investment and retail arms of banks simply won’t stick – the regulatory arbitrage of the City of London will undermine them in no time. The Big Five banks in the UK still have far too much power, still controlling 95% of the retail market.

There is still not nearly enough transparency of the use of exotic financial derivatives which was the precipitating cause of the crash in the first place. The size of the financial sector concentrated in the Square Mile still prevents the desperately needed re-balancing of the economy and gives it undue influence in setting the exchange rate which is still far too high to the detriment of UK manufacturing, which explains the disastrous £100bn deficit in traded goods that the UK suffered this year and last. For all these reasons the reform of the banks so far has been grossly inadequate and sooner or later will not stop another crash.

5 Comments

  1. terry sullivan says:

    the principal cause of the crash was politicians including delusional–no more boom and bust-brown. he was correct about the boom bit

  2. Dave Roberts says:

    Brown presided over a massive spending and borrowing spree and is now trying to blame everyone else.

  3. Rod says:

    @ Dave Roberts

    That’s New Labour for you – as incompetent economically as they were militarily.

  4. treborc says:

    Rod that’s Labour for you, Blair came out which was fair enough, but Labour had changed years before Blair.

    As for the fat banana fingers of Brown the sad fact he is the issue labour have had for years a career politician who saw a means of getting a decent wage, who lost an election refuses to turn up for work but still takes his wages, OK according to the wee fat man he gives a lot to charity. But he and his Labour party could not even be bothered to fight the spare room subsidy.

    46 labour MPs many of them New Labour or as I call them labour refuse to vote.

    The issue to day is which party would kick you the hardest if you feel it’s Labour vote Tory, if you think it’s the Tories vote labour sadly they are so close I bet both will have steel toe cap boots ready
    Labour died in the years after the miners strike.

  5. Rod says:

    @ Treborc

    Yesterday I read an interesting piece by U.S. political thinker (among other things) Noam Chomsky. He was commenting on the way he, though a figure with an international reputation, hasn’t been able to get much of a hearing in the mainstream media. He’s in his 80s now so has lived long enough to be able to offer a valid overview. He said:

    “If you take a look at the progressive changes that have taken place in the country, say, just in the last 50 years – the civil rights movement, the antiwar movement, opposition to aggression, the women’s movement, the environmental movement and so on – they’re not led by any debate in the media,” Chomsky said. “No, they were led by popular organizations, by activists on the ground.”

    This is why I think there are more important priorities than getting another Establishment-supporting, democracy-fearing, careerist politician into No 10.
    I’m no longer a member of the LP and I doubt I shall be voting in 2015 but this doesn’t mean I’m politically inactive.

    In fact, I’m coming to regard a commitment to the Labour Party as a form of political inactivity.

    Here’s the link to the Chomsky piece:

    http://www.rawstory.com/rs/2013/12/27/noam-chomsky-were-no-longer-a-functioning-democracy-were-really-a-plutocracy/

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