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Break up the banks, or face another crash

Banks at Canary WharfBanking was the subject of a House of Commons debate yesterday. MICHAEL MEACHER spoke, and here we publish an edited version of his contribution:

The government’s contribution to this debate seemed to me to be almost totally devoid of any new, serious content. The record of the banks over the past five years has been so riddled with abuse of power, criminal malfeasance, reckless speculation and pervasive mis-selling of financial products. Facilitation of contrived tax avoidance on an industrial scale. The rigging of the LIBOR and Euribor interest rate benchmarks. A growing and dangerous development of a shadow banking system. And continued dalliance with the exotic financial derivatives which precipitated the worldwide crash of 2008-9. When combined with the fact that there has been very little fundamental reform so far, there must be a serious risk of another financial cataclysm in the foreseeable future.

The central fact about banking power in Britain today is that 85 per cent of the public’s money in the retail market is controlled by just five big banks. These can—and do—use that money without any accountability to the public interest. The total gross spending of the banking sector reached £7 trillion—five times GDP—in mid-2011. Although it has somewhat reduced today, it still exceeds total government spending by a factor of almost 10:1. That means that this tiny banking clique commands more spending power to control the UK economy than the entire machinery of government.

How does it use that power? The most striking fact about the British economy over the past five years—we all know this—is that the banks’ lending to industry has largely been negative for most of that time. At the same time the banks have continued with their indulgence in property, overseas speculation, tax avoidance and risky derivatives. In the light of that, it surely is the case that the power of this dominant clique of the top UK banks, which has been so badly misused against the public interest, has to be broken up.

By being too big to fail, the banks exacerbate moral hazard, because the knowledge of the explicit taxpayer guarantee encourages excessive risk taking and recklessness. They have failed in their pre-eminent duty to keep adequate funding flowing to UK business, and through their size and weight they choke off competition and new entrants to the market. Initially, that should be brought about by a clean break between retail and investment banking. The Vickers alternative of Chinese walls—separating the two functions within a single, still-integrated structure—is flawed owing to the fact that the City will in no time circumvent it through regulatory arbitrage.
Beyond that initial break, I believe there are strong grounds for further disbandment. That is, disbandment in order to pave the way for what Britain really needs at this time:  regional banks such as the Sparkassen banks in the German Mittelstand. And specialist banks concentrating on infrastructure development, the knowledge and information industries, investment for a low-carbon economy, small businesses and so on.

The fact is that the finance sector is always the most dangerous component in a capitalist economy, particularly in the deregulated version imposed in the 1980s. It is surely clear that nothing like enough has yet been done to give assurances to the economy and to taxpayers that we are now protected against the depredations of the finance sector.

The truth is that the big banks knowingly gamed the system for so long in order to expand their balance sheets ever faster and with ever lower capital ratios, based on the bogus claim that their lending was then less risky. They even deliberately invented the colossal credit default swaps market as an asset class in order to enable the hedge funds to speculate against collateralised debt obligations, and they gained regulators and investors alike, using their vast lobbying power to create the relaxed regulatory environment which, of course, is at the root of all of this.

That lobbying power—probably the most formidable in Britain—is still being used ferociously to chip away at any, or every, new proposed regulation at both domestic and EU levels. As a result, capital ratios are still too low. The proposal to raise them is wrongly being delayed until 2018-19 to fit in with Basel III. The use of offshoring and tax havens has hardly been reduced at all. Lending to UK industry remains deplorably low. The shadow banking system has not been effectively tackled. And managerial oversight will not be enforced until the Tyrie commission proposal, which is a good one, to hold individual directors and executives to account by disqualification or a custodial sentence is implemented.

My last point concerns the control of the money supply. The banks have, in effect, seized control of the money supply. They have become major generators of unsustainable asset bubbles, which is a source of great instability to the economy and of enormous cost to the taxpayer. They control 97 per cent of domestic credit creation and have used their virtual monopoly over it to feed successive property booms and speculative foreign ventures while allocating—this is the key point—just eight per cent of the nation’s resources to UK productive investment in the form of manufacturing, communications and distribution.

The case for bringing back control of the money supply to public hands—as was always the case in this country until the 1980s—is crucial, partly to prevent the skewed allocation of national funding excessively towards mortgaged property; partly to rebalance the economy from finance to manufacturing when our balance of payments on traded goods is currently running at a deficit of more than £100 billion every year, which is frankly unsustainable; and partly to channel a huge amount more of our resources into real, productive investment, without which Britain will never recover its global competitive position.

The banks have massively let down this country and they continue to do so. The extensive restructuring of the financial sector is critical for the future of this country, and that requires far deeper reform than the present Government are trying to get away with.

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