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The No-Nonsense Guide to Global Finance

Globalization, climate change, terrorism, fair trade, human rights, health, poverty… The No-Nonsense Guides help make sense of these vast and complex issues, all in under 150 pages - providing a concise, ‘no-nonsense’ view that you can read anywhere. Over the coming weeks, we’ll be highlighting each No-Nonsense Guide in our series with blog posts from the authors concerning the subject of each book. Chapter 1 and the Table of Contents are available for The No-Nonsense Guide to Global Finance on our website.

NN Global FinanceThe No-Nonsense Guide to Global Finance

by Peter Stalker 

When writing The No-Nonsense Guide to Global Finance, I was not surprised by the fact that bankers were becoming obscenely rich by taking huge risks. Risk-taking is after all what you would expect from entrepreneurs, many of whom have not just made huge fortunes but also lost them in spectacular bankruptcies. The real shock was to discover the extent to which banking had evolved into a special case of state-subsidized capitalism that underwrites one-way bets. Indeed banks are the corporations least likely to be ‘rupt’. A big enough bank can make huge gains through speculation knowing that if it makes catastrophic losses it can rely on a public bail-out if the state frets that its collapse would crash the financial system. The end result is the now familiar and toxic combination of privatized profits and socialized losses.

I started writing the book at the beginning of 2008. At that time it was intended to be a guide to money. But as I started work, the entire financial system began to implode and the publication had to take on a broader aspect. For me, that had the disadvantage that the book market was soon awash with competitive coverage of finance and its woes. On the plus side, of course, this should have increased the opportunities for us all to learn the lessons of a crisis that may not have hurt bankers too much but has thrown millions of other people out of work.

Unfortunately not. The most recent evidence is the British Government’s feeble agreement with the banks, announced on February 10, known as Project Merlin. Supposedly designed to bring the bankers to heel it represents another dismal capitulation. It only requires banks to hold bonuses to last year’s level (something like £8 billion, in case you were worried). The boss of Barclays alone is in line for a cool £8 million. And as for the requirement that the banks should support British business with additional loans, the increase agreed is derisory. As the Economist, which is no fan of government regulation, has pointed out: “An extra £11 billion of loans, split among four firms with trillions of assets between them, is a rounding error.” And even that assumes that they do not simply offset these new loans by calling in old ones.

Why the timidity? Supposedly this is because we are nervous that these financial wizards would take offence and abandon our shores taking with them whatever tax they choose to pay. But where exactly are they going to go? Perhaps they could decamp to some sunny tax haven like the Cayman Islands. But wait a minute. That would mean that they would have to look to the Government of the Cayman Islands to bail them out next time. Not very wise. Even an economy as large as Ireland’s has been brought to its knees by its rash promise to guarantee the survival of Allied Irish and other second-tier banks.

Now consider the Royal Bank of Scotland, which at its height was the world’s fifth largest bank with loans greater than the UK’s entire GDP, and now nestling in the comforting arms of the British taxpayer. Any country want to host the smart suits from RBS? I thought not.

Nowadays as Stanley Johnson, former Chief Economist at the IMF, has written in the New York Times, the credit rating agencies, such as Standard and Poors, when looking at banks do not just consider the state of banks’ balance sheets but also the creditworthiness of any government that might be expected to prop them up. He says: “the idea that megabanks would move to other countries is simply ludicrous. These behemoths need a public balance sheet to back them.” The only possible shelters are probably London and New York. And even those guarantees may not hold. The largest banks are moving beyond being too big to fail. In most countries they are now too big to save.

The US has also been picking over the entrails of the crisis, through its supposedly bipartisan Financial Enquiry Commission. The main report, published on January 27th, concluded that the crisis was “in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves.” Unfortunately while the main report, backed by the Democrats on the Commission, rightly blames the financial industry, the Republicans members issued rebuttals pointing their fingers at many more culprits, particularly at the regulators. A failure of big business must always be interpreted as a failure of big government. With a Republican Congress for the next few years it seems that the US too will squander another opportunity to bring the banks under control.

If there is to be another edition of The No-Nonsense Guide to Global Finance it will unfortunately not need too many revisions.