Monday, October 17, 2011

Should We Blame The Bankers?

Last week I was in Manhatten, New York. I did think about going to visit the protesters on Wall Street, but preferred to sip cappuccinos in other suburbs of New York. I may not be an actual protester, but I can still be a 'coffee shop philosopher'. Are the protests against 'Wall Streets' greed, recklessness and selfishness justified? and can anything constructive come out of these popular demonstrations?

Essentially, we are experiencing a crisis due to failures amongst the financial elite. This crisis was caused by a combination of factor but foremost amongst this were mistakes, at least partly, driven by greed and arrogance.

If we look at the causes of the credit crunch. Top of the list would include:
  • Encouraging selling of mortgages people couldn't afford
  • Selling on risky assets to try and make them look safe.
  • Failure to take appropriate steps to ensure stable banking.
  • A pursuit of short term banking profit over long term sustainability.
  • Failure of credit rating agencies to adequately reflect risk.
  • Who is to blame for credit crisis?
For those uncomfortable with the idea the free market can fail, it is popular in America to blame the whole crisis on government mortgage agencies, even though they accounted for only very small % of bad sub-prime loans. But, the credit crisis of 2008 was essentially a failure of the free market and financial sector. To claim otherwise is to clutch at straws or engage in intellectual dishonesty. It was a failure of the financial system with both individual and corporate mistakes. There were too many willing to take risks and pursue profit at the expense of long-term prudence.

When the financial system ground to a halt. It was government intervention and the general taxpayers who stood in to solve the liquidity crisis. Governments did the right thing. If the taxpayer hadn't come to the rescue, we could have been facing a real depression.

But, there is a feeling financial institutions want the best of both worlds. When things go well, they advocate the free market, lower tax and the absence of government regulation. But, when things go badly, they anticipate state socialism to save them from their own mistakes. If an ordinary firm, had lost the billions financial firms did, there would have been no 'propping up of inefficient firms'. It is rather ironic that in the land of Capitalism, there was need for such state intervention in the most capitalistic of markets.

If your industry gets bailed out by the taxpayer, you can't complain if the taxpayer then starts asking questions such as why are you still getting so many bonuses? or Why do those living on investments, pay such a low rate of tax?

A few years after the credit crunch, little seems to have changed. The taxpayers got a raw deal for giving so much money. In America, there was not even the compensation of share ownership for all the money pumped into the financial system. There has been no fundamental change in regulation of the financial sector. Even very modest tax increases get scorned.

The past two decades have seen a rapid rise in inequality. The proceeds of economic growth have increasingly benefited the higher earners. Those at the lower end of the spectrum, have faced rising unemployment, stagnant incomes and increased pressure on living standards.

It is the case, that many of the wealthiest pay lower tax rates (e.g. capital gains 15%) than those on average incomes (35%). There is a feeling that the system is staked towards benefiting the richest, and they are right - it is. If there is any suggestion for increasing taxes on the rich, there is a media empire ready to shout how damaging to job creation it will be. But, the tax cuts for the high earners we have seen in the 80s, 90s and 2000s have not created the jobs or prosperity advocates would claim. Instead, the tax cuts saw the US with an increasing budget deficit in the boom years, leaving them less room for manoeuvre in the good years.


You can be very critical of capitalism and how it operates without being anti-capitalist. In the post war decade, the US and western Europe experienced rising economic prosperity and near full employment. The fruits of economic growth were shared across the income spectrum; it wasn't the preserve of the financial elite. The banking system worked relatively well. There was a focus on sustainable lending and encouraging saving to finance lending. This was a period of financial regulation and high tax rates. (The very tax rates critics argue would be devastating, were actually were complementary to a period of economic stability, growth and prosperity.)

Marx was wrong because he felt Capitalists would squeeze the workers until they wanted a revolution. Actually what happened is that capitalist paid higher wages to workers and workers were happy to be able to buy cars and goods. Who wants a revolution when you have a job and reasonable income?

Also as workers prospered, capitalists could sell even more goods and make more profit. Canny capitalists realised the better the average worker was, the better for them. Successful capitalism requires the spoils to be shared with a degree of fairness and equality. Reducing inequality in society, removing the scope for unnecessary financial risk taking, will not lead to stagnant growth - It would be good news for everyone, even those at the top.

Banks need to be regulated to prevent situations which encourage unnecessary risk taking.

Bash a Banker

It can soon become very crude to blame all societies ills on bankers. I could easily have been a banker myself; it doesn't make you a good or bad person. It is just at the present time, society enabled a system where the financial system was encouraged to take reckless risks which were guaranteed by the taxpayer. When it is good, the rewards were taken by the wealthy. When things were bad, it was shared amongst everyone. In the UK David Cameron famously said 'We're all in this together' - What he meant is we are all sharing the austerity together. But, in the good times, we were definitely not sharing all the proceeds of financial derivatives.


I'm happy to read about the protests. The financial system still needs reform to make it work for everyone, not just those at the top. There has been too much shift in wealth and influence to a privileged minority. At the present time, there is a great need to tackle unemployment; and in the longer term make the financial system work for society rather than society bailing out the bankers.


1 comment:

Anonymous said...

Bankers are in the competition race for quick and big dollars, you can't blame them for doing that for some degree.

The central banks are the ones who are responsible for policies which ensure optimal price stability and keep the financial system in good condition (a role of being a regulator). They chose not to regulate the derivatives markets. They chose not to prevent banks from becoming too big to fail. They failed to make sure banks didn't leverage too much. They choose not to look very thoroughly what's not on the balance sheets of banks. They chose not the prevent banks from predatory behavior. They chose not to interfere with the perverting bonus culture that made bankers going for a self-destructive appetite for dollars. So they didn't choose to do what they were supposed to do. In some cases they even chose to do things that aren't mandated, such as stimulating stock markets or providing liquidity to foreign commercial banks.

Banks have been privatizing profits and socializing their losses. This wouldn't be possible if the government wouldn't cooperate. Instead of the stock and obligation holders of those banks to take their hit for their own misplaced bets, the government let the taxpayer pay. The taxpayer got punished for crimes they didn't commit. The government didn't do what it supposed to do. And as a result moral hazard and sovereign debt crisis and ever more illiquid capital markets.

Jobs outside the banks were lost, jobs which are hard to replace as there is stiff competition because of outsourcing. And because tax won't cover for the bills, and as uncertainty plagues the markets interest rates go up. Eventually as it becomes harder and harder for governments to refinance ever growing sovereign debts they will print their way out of it and inflating their debt away stealing purchase power of it's citizens. And if that wouldn't be bad enough they also come with protectionist policies.