Amid all the reckless gambling of recent years, British banks did make one sound bet: they guessed that they were so vital to the economy that politicians would never let them fail.
Sure enough, as crunch turned to crisis and crisis turned to panic, the Prime Minister and the Chancellor last week announced a rescue package of breathtaking scale: £50bn to rebuild banks' capital stores; at least £200bn of cash available through the Bank of England's 'special liquidity scheme'; a guarantee worth £250bn of further borrowing by banks on wholesale money markets.
It was the right thing to do. Since the economy depends on a flow of capital from banks to businesses and households, and because mutual distrust has stopped banks lending to each other, it falls to governments to put money back into the system.
While the US Treasury was faster to act in a manner appropriate to the scale of the crisis, the British response is smarter. The American plan, worth $700bn, was essentially to purchase toxic debt from failing banks - turning the taxpayer into the buyer of last resort for assets that the market had rejected. The UK approach puts money closer to the heart of the problem, pouring capital directly on to bank balance sheets and taking part ownership in return. Instead of bailing water out of the leaky vessel, Alistair Darling and Gordon Brown are trying to plug the leak.
Given the global nature of the crisis, the British initiative will only work if the rest of the world follows suit. Henry Paulson, US Treasury Secretary, said last week that he was prepared to do just that. The US government may now invest directly in the nation's banks for the first time since the 1930s.
European governments have been less ambitious, some because they prefer to deal with bank failures on an ad hoc basis, and some because they doubt the crisis will hit them as hard as it has the 'Anglo-Saxons'. They are mistaken. No financial institution is safe. Only a systemic rescue will stabilise the situation. Politicians cannot wait for the market to signal trouble and then react; they must wrest control of the economy away from panic-stricken markets.
But bankers resist government involvement in their affairs with something like religious zealotry and the Brown-Darling rescue plan contains no clear strategy for bringing them to heel. The Prime Minister said that public investment will come 'with strings attached', but added that the detail would be negotiated on a case-by-case basis.
It is asking too much of taxpayers to put their money up front without explaining what they will get in return. Some concessions should be non-negotiable.
First, the banks should accept the presence of a government official or civil servant on their boards of directors and remunerations committees. The banks will need constant reminding that they owe their survival to public money and that they should start running their businesses with more respect for the public interest.
Second, the banks should not treat the government's equity stake like a simple loan. They cannot expect that, when the current crisis has passed, government will step back from its investment without extracting a profit. Having part-nationalised the banks, the state must manage its shareholding to yield the best return for the taxpayer.
Third, the banks must not hoard their new capital. The rescue is only justified if it brings liquidity back to the economy. That means lending on the High Street again.
That is the minimum required to make the package palatable to voters. It would be a fair exchange for government ramping up the national debt, blasting a hole in its spending plans and facing down public rage at the sight of rich financiers piling into state-sponsored lifeboats while everyone else must swim through the coming recession or sink in it.
Having stabilised the banking sector, the government will have to embark on wider reform of the City. It must make financial services more transparent, more accountable and subservient to the wider economy.
That means, for example, curtailing the anonymous trade in complex securities and derivatives. Those arcane instruments are at the heart of the current crisis because they were used to disguise liability for debt defaults - spreading hidden risk across the global system. If they are to survive at all, they should be swapped on a regulated exchange, where traders are identifiable and their accounts open to scrutiny.
The rating agencies, which failed to identify how risky many widely traded assets were, must also be reformed. The conflict of interest whereby the agencies take fees from the banks whose investments they are supposed to analyse must be addressed.
The banks must separate their investment and retail arms. They must decide whether they want to be taking deposits and lending to customers or managing funds and speculating on financial markets. They must also be forced to maintain healthy ratios of capital to debt - storing cash during a boom so they can lend in a downturn.
None of that can be achieved without the banks' co-operation. But there seems little prospect of that when the bankers are not showing any remorse. While politicians are accountable at the ballot box, the bankers face no equivalent public judgment. While the Chancellor and the Prime Minister take to the airwaves to defend their actions, City bosses have gone to ground. Not one executive has owned up to presiding over a catastrophe, apologised and resigned. No bankers have put themselves in a public forum to explain, for example, why they deserved to be paid multimillion pound bonuses for decisions that led to the biggest economic crisis in living memory, or what drove them to make those decisions, if not arrogance and greed.
If the bankers will not volunteer to give an account of themselves, they must be compelled to do so before a public inquiry. It will take a forensic examination of how this crisis came about to design a regulatory system to prevent it being repeated. It will also take some show of contrition by bankers before public confidence and trust in the financial system can be restored.
For a generation, politicians have taken orders from the City, creating tax breaks and cutting regulation lest the captains of global finance flee to softer jurisdictions abroad. Some bankers think their power will not diminish. Some have even complained that the government was not quick enough to respond to their needs, that Mr Brown and Mr Darling 'dithered'. That cry for help marks an abrupt change in tone from the old demands for freedom from interference.
The City seems to believe it can turn to the state for aid in a crisis and the return to business as usual. Wrong. The bankers also seem to think they enjoy indefinite protection by the dwindling band of politicians, mostly Conservatives, who still opine on the benefits of deregulation and gigantic pay incentives for the City. Wrong again.
With £500bn of taxpayers' money keeping them afloat, the banks are in no position to be giving orders, nor to be paying themselves exorbitant sums. With public money must come public accountability. The banks thought they were too big for politicians to let them fail and they were right. But if voters get no explanation and nothing in return for their money, their fury will be too great for politicians to ignore.
It was the right thing to do. Since the economy depends on a flow of capital from banks to businesses and households, and because mutual distrust has stopped banks lending to each other, it falls to governments to put money back into the system.
While the US Treasury was faster to act in a manner appropriate to the scale of the crisis, the British response is smarter. The American plan, worth $700bn, was essentially to purchase toxic debt from failing banks - turning the taxpayer into the buyer of last resort for assets that the market had rejected. The UK approach puts money closer to the heart of the problem, pouring capital directly on to bank balance sheets and taking part ownership in return. Instead of bailing water out of the leaky vessel, Alistair Darling and Gordon Brown are trying to plug the leak.
Given the global nature of the crisis, the British initiative will only work if the rest of the world follows suit. Henry Paulson, US Treasury Secretary, said last week that he was prepared to do just that. The US government may now invest directly in the nation's banks for the first time since the 1930s.
European governments have been less ambitious, some because they prefer to deal with bank failures on an ad hoc basis, and some because they doubt the crisis will hit them as hard as it has the 'Anglo-Saxons'. They are mistaken. No financial institution is safe. Only a systemic rescue will stabilise the situation. Politicians cannot wait for the market to signal trouble and then react; they must wrest control of the economy away from panic-stricken markets.
But bankers resist government involvement in their affairs with something like religious zealotry and the Brown-Darling rescue plan contains no clear strategy for bringing them to heel. The Prime Minister said that public investment will come 'with strings attached', but added that the detail would be negotiated on a case-by-case basis.
It is asking too much of taxpayers to put their money up front without explaining what they will get in return. Some concessions should be non-negotiable.
First, the banks should accept the presence of a government official or civil servant on their boards of directors and remunerations committees. The banks will need constant reminding that they owe their survival to public money and that they should start running their businesses with more respect for the public interest.
Second, the banks should not treat the government's equity stake like a simple loan. They cannot expect that, when the current crisis has passed, government will step back from its investment without extracting a profit. Having part-nationalised the banks, the state must manage its shareholding to yield the best return for the taxpayer.
Third, the banks must not hoard their new capital. The rescue is only justified if it brings liquidity back to the economy. That means lending on the High Street again.
That is the minimum required to make the package palatable to voters. It would be a fair exchange for government ramping up the national debt, blasting a hole in its spending plans and facing down public rage at the sight of rich financiers piling into state-sponsored lifeboats while everyone else must swim through the coming recession or sink in it.
Having stabilised the banking sector, the government will have to embark on wider reform of the City. It must make financial services more transparent, more accountable and subservient to the wider economy.
That means, for example, curtailing the anonymous trade in complex securities and derivatives. Those arcane instruments are at the heart of the current crisis because they were used to disguise liability for debt defaults - spreading hidden risk across the global system. If they are to survive at all, they should be swapped on a regulated exchange, where traders are identifiable and their accounts open to scrutiny.
The rating agencies, which failed to identify how risky many widely traded assets were, must also be reformed. The conflict of interest whereby the agencies take fees from the banks whose investments they are supposed to analyse must be addressed.
The banks must separate their investment and retail arms. They must decide whether they want to be taking deposits and lending to customers or managing funds and speculating on financial markets. They must also be forced to maintain healthy ratios of capital to debt - storing cash during a boom so they can lend in a downturn.
None of that can be achieved without the banks' co-operation. But there seems little prospect of that when the bankers are not showing any remorse. While politicians are accountable at the ballot box, the bankers face no equivalent public judgment. While the Chancellor and the Prime Minister take to the airwaves to defend their actions, City bosses have gone to ground. Not one executive has owned up to presiding over a catastrophe, apologised and resigned. No bankers have put themselves in a public forum to explain, for example, why they deserved to be paid multimillion pound bonuses for decisions that led to the biggest economic crisis in living memory, or what drove them to make those decisions, if not arrogance and greed.
If the bankers will not volunteer to give an account of themselves, they must be compelled to do so before a public inquiry. It will take a forensic examination of how this crisis came about to design a regulatory system to prevent it being repeated. It will also take some show of contrition by bankers before public confidence and trust in the financial system can be restored.
For a generation, politicians have taken orders from the City, creating tax breaks and cutting regulation lest the captains of global finance flee to softer jurisdictions abroad. Some bankers think their power will not diminish. Some have even complained that the government was not quick enough to respond to their needs, that Mr Brown and Mr Darling 'dithered'. That cry for help marks an abrupt change in tone from the old demands for freedom from interference.
The City seems to believe it can turn to the state for aid in a crisis and the return to business as usual. Wrong. The bankers also seem to think they enjoy indefinite protection by the dwindling band of politicians, mostly Conservatives, who still opine on the benefits of deregulation and gigantic pay incentives for the City. Wrong again.
With £500bn of taxpayers' money keeping them afloat, the banks are in no position to be giving orders, nor to be paying themselves exorbitant sums. With public money must come public accountability. The banks thought they were too big for politicians to let them fail and they were right. But if voters get no explanation and nothing in return for their money, their fury will be too great for politicians to ignore.
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