It’s not the principle of financial regulation that can be in dispute, but the practice. By and large, regulation has been pretty good for bankers. Among other things, they need protection from each other. Without some form of regulation – and weak regulators to carry the can when things go awry – they would be unable to function at all.
In the 1950s and 1960s, higher levels of financial regulation accompanied relatively rapid increases in general prosperity, and almost no financial crises. Banks did as well out of that as anyone else.
By and large, regulation has been pretty good for bankers. Among other things, they need protection from each other
When financial deregulation began in the 1980s, general prosperity stagnated and financial crises multiplied. Banks became more profitable than any other economic sector, accounting for as much as 40 per cent of all corporate profits in the US.1
❛Advance with light-touch regulation!❜
Gordon Brown, British finance minister, 2006
This might have resembled banking bliss, had the story stopped there. But of course it didn’t. ‘I have found a flaw,’ a shocked Alan Greenspan – the Great Deregulator while he was boss of the US Federal Reserve – revealed in October 2008.2 The theory of self-regulating financial markets that had justified deregulation turned out to be completely wrong. So wrong, in fact, that the meltdown caused by the banks had wiped out – among other things – their own mega-profits from the years before.
❛Throughout the 19th century, when there was a laissez-faire mentality and insufficient regulation, you had one crisis after another.❜
George Soros, financier
Deregulation had not been an unqualified success, then, even for the banks. It would have been a terminal disaster, had it not been for just one thing. Banks can blackmail entire societies by threatening to halt the flow of money altogether. So their losses were hastily bailed out by governments, and ‘austerity’ was imposed on the general public instead.
The central bankers’ bank, the Bank for International Settlements, has been overseeing a slow ‘recapitalization’ of banks, due to be completed some time around 2019. The theory is that the more of their own money they are required to hold in reserve, the less likely banks are to need bailing out. But they would also have less money to lend, and would make less profit. So the banks are stalling as hard as they can, which is pretty hard. Chances are that, by 2019, recapitalization will be nowhere near sufficient to make banks truly safe, so the public will remain exposed to the growing risk of another failure into the indefinite future.3
‘Regulations put in place so far would not suffice to prevent another collapse of the financial system,’ concludes one well-informed group of independent analysts.4 The causes of the 2008 financial crash remain largely unaltered. Big banks are still ‘too big to fail’. They have not been broken up, nor their retail (high-street) and investment (casino) functions separated completely. Banks are still gambling at their depositors’ expense.
‘The scale of misconduct in some financial institutions has risen to a level that has the potential to create systemic risks,’ laments Mark Carney, boss of the new Financial Stability Board (FSB), as well as the Bank of England.5
The FSB can observe the financial weather, but not change it. By the end of 2013 the world’s top 1,000 banks were back in business, making close to $1 trillion ($1,000 billion) in pre-tax profits; an all-time record, up 24 per cent on the year before.6
The historical record suggests that financial crises happen on average every 10-15 years, and that spiralling bank profits are a forewarning. So the next one is due any time soon. Yet, with interest rates close to zero, none of the current means of ‘recovery’ from financial crisis – lower interest rates, bailouts – is available.
Regulation has its limitations. Just as it takes a criminal to catch one, so it takes a banker to regulate one – an inside job. Regulation is not an alternative to the criminal law on fraud and the like. It is arguable that taxes on financial transactions, or speculation, are simpler and more effective means to similar ends. Governments are by no means infallible. But they are, notionally at least, accountable to the public. Financial markets are accountable only to themselves.
There is, in neoliberal economic theory, no justifiable limit to the profits of banks. In any other economic theory there is no justification for banks to be more profitable than anything else, nor for bankers to pay themselves as they do. They have proved quite capable of destroying themselves, and much else besides. Deregulation, not regulation, destroys their profits. In an even halfway saner world, and in the interests of self-preservation if nothing else, bankers would surely be among the most avid of all advocates of regulation.
Joseph Stiglitz, Freefall, Penguin, 2010. ↩
The Guardian, 24 October 2008. ↩
Anat Admati & Martin Hellwig, The Bankers’ New Clothes, Princeton, 2013. ↩
SOMO, Centre for Research on Multinational Corporations, Preventing the Next Financial and Debt Crisis, paper addressed to G20 finance ministers, Amsterdam, 12 June 2015. ↩
Mark Carney, Letter to G20 Finance Ministers and Central Bank Governors, Financial Stability Board, 4 February 2015. ↩
The Financial Times, 14 June 2014. ↩