How to avoid the next banking crisis

Banks have been seen as at the heart of capitalism through their ability to create new purchasing power out of nothing and to direct funds into the most profitable areas. They can also be seen as machines for making money: every £1 deposited with them can be re-lent and re-deposited many times – provided the bank has the backing of a central bank or a government (i.e. taxpayers) to bail them out if, as in 2007, there is a run on the bank. This why the government resorted to quantitate easing following the banking crisis in 2007. Quantitative easing is a slightly more sophisticated version of printing money, the principal difference being that, instead of using this money to pay the government’s debts, it is given to the banks in the hope that the banks will use it to finance economic development. As if! It has been estimated that only 25% of bank lending in the UK is currently used to support businesses, and half of that is used to buy commercial real estate rather than support truly productive economic activity. Given that of the 12.5% going to businesses non-property investment, only a small proportion will be for truly productive investment, it’s clear that the sacrifices that ordinary working people have been required to make since 2007 in terms of cuts in services and wage freezes have yielded them a very poor return.

So what are the banks doing with ‘our’ money following their near collapse in 2007 and subsequent, and continuing bailout?

In addition to continuing to pay huge salaries and bonuses, much of it has been misused, as revealed in a series of post-2007 scandals such as:

• Fruitless speculation such as JP Morgan’s loss of $6 billion from trading activities of which CEO was blissfully unaware.

•Price fixing at LIBOR. The London Interbank Offered Rate has been manipulated by banks for their own profit.

• Market abuse by ‘flash trading’ underpinned by the big banks whereby security prices paid by ordinary investors have been manipulated using ultra-fast software and communications.

•Money laundering: Accusations of illegal, clandestine bank activities are also proliferating. Large global banks have been accused by U.S. government officials of helping Mexican drug dealers launder money (HSBC), and of funnelling cash to Iran (Standard Chartered).

•Tax evasion: In just one example, UBS helped 20,000 U.S. taxpayers with assets of about $20 billion hide their identities from US authorities. In the UK, the banks are unapologetic about being up to their necks in tax “avoidance”.

•Misleading clients with worthless securities: Only after the financial crisis of 2008 did people learn that banks routinely misled clients, sold them securities known to be garbage, and even, in some cases, secretly bet against them to profit from their ignorance.

The most serious abuse of all has, however, been that our banks continue to trade in derivatives in many of the same ways they did before the crash, but on a larger scale and with precisely the same unknown risks. Derivative trading now totals more than $700 trillion. That is more than ten times the size of the entire world economy.

It is a myth to believe that under capitalism we can have responsible, honest and transparent banks. They wield too much power in a capitalist society to be tamed. The capitalist parties, including Labour, have no intention of interfering with them. If the next, inevitable financial crisis, which is likely to be far more damaging than that of 2007, is to be avoided, not only do we need to bring the banks under democratic, public control, but this reform has to be accompanied by fundamental changes to our entire economic and political structure if it is to succeed. What are these changes? In a word: socialism.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s