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What to do about the banks and bankers?

June 30, 2012

I guess we were all shocked but not totally surprised by revelations about bankers this week.  Over the last few years the cornerstones of a functioning liberal democracy – a trusted legislature, independent press and free markets, have all been shaken to their foundations, rocked by scandal.

The minority of MPs who fiddled their expenses have, in the main, been drummed out of Parliament by their parties or the voters.  Some have seen the inside of one of Her Majesty’s less agreeable institutions.  The expenses system has been made independent and has tough rules.  The Speaker has made an enormous difference to the ability of backbench and opposition MPs to question ministers.  But it will be a while yet before the public respect or at least stop holding Parliament in contempt.

Press barons and their minions have been summoned before the Leveson Enquiry.  Owners, editors, commentators and reporters have had their motives and morals questioned in public.  Most of them must have hated it.  And we must hope that Justice Leveson makes recommendations that will clean up our media, while preserving free speech.

But what of the banking industry?  We poured £66billion into acquiring shares in RBS and Lloyds, which someday I would like to see transferred to every citizen.  The whole banking sector was saved by billions more in loans and guarantees.  Yet while the banks were in danger of heading over a cliff it is now revealed that the main priority of some of t heir employees  was to fix the loan interest market, to land themselves a fat bonus.  Some gratitude.

I was in Canary Wharf one evening last week for a London gay pride event.   The view from the 30th floor of a City law firm was striking.  Separate towers for all the main banks and the consulting firms who work along side them on the millions of transactions and deals.  At ground level this financial village, derelict docks 30 years ago, was buzzing with activity as people enjoyed the night time economy.  It is easy to be in awe of what you see, London as the world’s leading financial centre.  It was if the near collapse four years ago had never happened.

And that’s the problem.  For many people there has been no closure on the financial crisis.  The “credit crunch” is still being felt by many small and medium businesses.  The economy, which shrank by 7% in 2007 – 2009, has still not recovered to pre crash levels.  Yet inside those gleaming towers in the City and Canary Wharf there are thousands of people still on enormous salaries and believing themselves entitled to huge bonuses.  They have been cocooned from the rest of UK plc, insulated from the tough world of the real economy and the wrath of public opinion.

So what can be done?  The government, the bankers themselves and we the public can all take action.

First, the Coalition Government’s central and unifying purpose is to balance the nation’s books, get the economy growing and reform the banks.  Progress is being made on all three fronts but Cameron, Clegg, Osborne and Cable need to drive the Coalition forward with radical reform.  The Financial Services Bill is already in Parliament, toughening up the lax  regulation left to us by Brown, Balls and Miliband.  The government must also press ahead with shaking up the banks, ring fencing customers from the “casino” activities that have been laid bare this week.  We also need some real competition.  The banks are unlikely to change when they exist in an oligopoly of world wide brands.  We need to make it easier for new banks to enter the market.  They could be local community banks, just like the building societies that were de-mutualised and then swallowed up by the banks 20 years ago.  There could be new banks specialising in small businesses and social enterprises.  There is surely room for more ethical banks, such as Triodos based in Bristol.

And the bankers?  Well it’s time the banks cleaned up their own profession.  The City is full of intelligent, bright people who can only work in this lucrative sector after passing professional exams.  Bankers may behave stupidly, but they are not stupid.  But when did you last hear of someone being chucked out of the Institute of Bankers?  All the other professional institutes, accountants, tax consultants, lawyers and corporate treasurers should be throwing the professional ethics book at some of their members.   There must surely be a clear out in the board rooms as many of the directors must have breached their fiduciary duties to act in the interests of the shareholders.  How on earth is Bob Diamond still at the helm of Barclays?

And us?  Well we can do more than shrug our shoulders or have a rant down the pub.  We are all customers and our combined financial fire-power is enormous.  The stats show that we are more likely to go through a couple of divorces than move away from our bank.  But moving our money would make them sit up.  So why not open an account with an ethical bank?  I have opened an ISA with Triodos.  Once the government’s reforms go through it should be much easier to move whole accounts, preferably to new providers.  The current big banks will have to change and work hard to earn our trust and our custom.

Finally, the government must break the spell that seems to have trapped previous administrations.  The City is indeed a major contributor to the UK economy.  I want our financial services industry, crucial in Bristol and many other cities, to prosper and be world leading.  But this cannot be at any cost.  Vince Cable has rightly referred to the “cesspit” of some City dealing rooms.  His Labour predecessor said that new Labour was “intensely relaxed about people getting filthy rich”.

The government must now initiate a short sharp enquiry into City business practices, to make sure our regulations can root out operations that distort the market.  But we also need a wider ranging review of business ethics.  As things currently stand it seems many city traders lack any understanding of ethics or personal morality.  I would like to see the authors of those toe curling emails hauled before an enquiry (if the courts don’t get them) to explain to the rest of us why they think they can behave in such a venal way, with lack of regard for the rest of society.

19 Comments leave one →
  1. June 30, 2012 1:56 pm

    well seeing you ask, Vince Cable described the destruction of the building societies/trustee savings banks etc as one of the greatest acts of economic vandalism in modern times. We do not need more banks owned by PLC’s -whose key concern is to build shareholder value we need a different model of ownership to compete with the dominance of PLC banks. Banks that are owned by their savers, where the value is locked in away from the grasping hands of the shyster capitalists- who got us into this mess in the first place- should be our objective.

    Jo Grimond came back from visiting the Mondargon Co-Ops enthused by their mutual bank which funded the expansion of the employee owned businesses. 100,000 people are now employed by employee owned enterprises and the bank has been described as the most successful entrepreneurial support system anywhere. We have lost all our regional banks and all the relationship managers. We want the banks to be permanently in the hands of the people not temporarily. Regional Mutual ownership will spread financial service jobs around the country, ensure a saner risk management policy, help control the hyper pay awards etc-what is there not to like about it? And the state can recoup it’s investment over the longer term. Kellog College came up with a suggestion how this could be done

    Click to access Mutuals%20oxford%20brochure.pdf

    we sound too much like kissing cousins of the Tea Party. It is the model of ownership that is the problem not competition

  2. RogerG permalink
    June 30, 2012 1:56 pm

    The rot at the heart of the UK banking system started in the 1970s with deregulation and removal of credit controls. Free-market economists assumed banks were simply intermediaries, who took in deposits and lent them out again. But in fact, in this digital age, a bank can make a loan by simply entering some numbers into a computer. The banks have been allowed to create debt, with minimal control and at huge profit to themselves, over the past 30 years or more. Most of the debt has gone to unproductive areas more profitable to the banks themselves, such as property and commodity speculation, through mortgages and complex financial products. Very little has been loaned to businesses for investment in production that would be beneficial to the economy.

    Of couse, this huge increase in speculative debt was unsustainable, leading to the ‘credit crunch’ of 2008, and the transfer of massive amounts of this debt to the public in the bailing out of the banks.

    The most recent examples – of the banks mis-selling financial products, and of fraudulently manipulating interest rates – are minor in comparison to the way in which they have ripped off the whole economy of the UK. It is futile to say, Stephen, that “it’s time the banks cleaned up their own profession”. They have been handed far too much power by successive governments.

    In the first half of the 19th Century, the private banks handed out ‘bank notes’ way beyond the value of the deposits left by their customers, leading to a series of financial crises. That led, in 1844, to the Bank Charter Act, which allowed only the Bank of England to issue new bank notes. It is once again time the government reclaimed the ability to issue money from the bankers.

  3. June 30, 2012 2:26 pm

    By “a short sharp enquiry” do you mean the government’s current order for a review of just the LIBOR fixing scandal, or a full public inquiry, led by a Judge, with legal powers to subpoena witnesses under oath, like Leveson Inquiry but even more rigorous, and no restrictions on whether evidence that comes out in the inquiry can be used in future prosecutions if it amounts to grounds for criminal charges?

    If you accept, as you seem to above, that the malfeasance and mis-administration in the financial sector is systemic and deeply rooted, not just a fleeting occasional instance of the LIBOR fixing scandal, or the PPI scam, or the predominantly speculative nature of financial ‘investment’ markets now, and the way the banks that have benefited from Quantitative Easing money are mostly spending it on speculation and not on investment in the productive economy?

    These issues are too systemic and deeply rooted to be solved by just a review into the LIBOR fixing scandal, they deserve a full judicial-led public inquiry. The banking sector needs a change in culture or ideology and not just some peripheral tightening of regulations.

    • June 30, 2012 5:24 pm

      I favour both, as the article says. We need a technical enquiry into LIBOR, which is what the govt has announced today. But we also need a wide ranging one into the ethics of banking, similar to Leveson.

      • June 30, 2012 6:45 pm

        Do you mean you think the government’s announcement today is not just an attempt to deflect attention from calls for a full public inquiry, but is a separate preliminary investigation and not meant to preclude a full public inquiry later? I hope so.

        Btw, I think you mean ‘inquiry’ not ‘enquiry’.

  4. June 30, 2012 3:46 pm

    Great piece Stephen, I mostly agree. Over two years since the coalition government was formed is rather a little late to keep blaming Brown. The government could have easily sorted out the banks within weeks of being formed. They can do a whole lot more than you’ve suggested but they wont. The main thing that should and could be done is to split the banks into ‘high street’ and ‘casino’ which would prevent any of this mess happening again to the British public, unless, of course, they’re shareholders of the ‘casinos’…x

  5. July 1, 2012 12:17 am

    I think there are some problems with your article, Stephen.

    “Well it’s time the banks cleaned up their own profession.” — why should they? So far, they’re making maoney at it, there is very little EFFECTIVE censure from the public or the government, they have lots of buddies supporting them around the world … why should they clean up their act? What they are doing works. Surely what you mean is, “it’s time for government to acknowledge that the banks either cannot or will not clean up their own professions.”

    Secondly, setting up a new ISA at Triodos is not exactly putting much pressure on “the banks”. Have you transferred money OUT of the major banks that you’ve been dealing with for years? Have you written any condemnatory letters to those who are mis-handling your money (and ours)? Seems to me your blog aritcle falls into the category of a rant down the pub.

    You are preaching to the coverted. Probably 99% of your readers agree that the bankers have a deep-seated, long-established cultural problem with ethics, with fairness, with honesty. Why are you not calling all of this “institutional greed”? It’s that word “institutional” that started the movement agaisnt racism in the police and the rest of the culture. In what way would you say the bankers’ current mindset is NOT “institutional”?

    How about blogging on the virtues of the Bristol Credit Union? How about blogging on the Bristol Pound? Push the boat out a little bit, Stephen. Otherwise it is all just waffle.

    • July 1, 2012 5:52 pm

      The article clearly says that the govt should take action. I just added that the professional bodies should take action as well.
      If you look elsewhere on this blog you’ll find several articles written in a condemnatory tone about banking, executive pay and tax avoidance. I am one of the few MPs with a long record of raising these issues. I have mentioned the Bristol Pound before. I also spoke at one of its launch events and met its founders when they were still working up the idea.

  6. July 2, 2012 5:32 pm

    The Chancellor has today announced that a joint committee of the House of Commons and Lords will look at professional standards in the banking industry. This, together with the narrow enquiry into the manipulation of LIBOR by Barclays, will enable timely recommendations to be added to the Banking Reform Bill already planned for January 2013.

  7. July 2, 2012 10:42 pm

    We can straight away write off the House of Lords in any government joint committee/debate because, as everyone knows, if the decision does not suit, the commons will, again, invoke parliamentary privilege…

  8. RogerG permalink
    July 3, 2012 10:46 am

    Neither an inquiry into the professional ethics of bankers, nor the resignation this morning of Bob Diamond, are going to solve the systemic problems of banking. Unfortunately inquiries and resignations are both means of sating the immediate demands for action, while leaving the banks to continue exploiting the public purse in other ways.
    Such exploitation can only be stopped by the government reclaiming from the banks the right to issue new money. So far it has cost the country over **2 trillion pounds** in lost revenue – money that has gone straight into the pockets of speculators and the already rich, when it could have been used for investment in productive businesses and public services.
    There is much more information on the way this has happened at, backed up with research from the New Economics Foundation. Positive Money have even drawn up draft legislation that could be used to fix it. However, since politicians seem to be beholden to the financial sector in the same way they have been shown to be beholden to Murdoch, it is highly likely nothing will be done.
    Stephen, you are ideally placed to start raising these wider issues – that is assuming you are not also holding out for a lucrative financial consultancy role in the future!

    • July 3, 2012 10:59 am

      Thank you RogerG, I second that!!

    • July 3, 2012 5:32 pm

      Exactly – what RogerG said, I third it! The creation of money by private banks which ends up being used for investment in asset bubbles is a problem that needs to be addressed by the government. I support the inquiry, but think the ethics of individual bankers is irrelevant if the system more or less guarantees increasing inequality. (Glad that Stephen supports moveyourmoney and the Bristol Pound btw, but the government needs to act on this ).

  9. July 4, 2012 5:40 pm

    Thank you for your reply to my email regarding this issue Stephen. However, I agree with most of the comments on here, that the problem is systemic and the kind of reforms needed will require us to go head to head with the banking sector and force them into reforms that they will resist to the last. I also agree that we need to completely reform the way in which money is created in this country, taking the ability to create new money as debt away from private banks. To financial speculators, this is all just a very profitable game of numbers, while to the general public it is so very real indeed. Have you looked into this issue of money creation by private banks, and are you willing to raise this issue in parliament?

  10. August 2, 2012 2:50 pm

    It’s really very simple, because we’ve done it all before. Following the Wall Street Crash and the Great Depression of the 1930s, laws were put in place such as the Glass-Steagall Act which enforced a number of regulations, including the separation of commercial banks from investment banks. It worked until the 1980s when, largely as a result of intense lobbying from the banking sector, they were repealed. We then, not surprisingly, went on a spending spree on money borrowed against artifically inflated assets that led to the current debacle. The solution is to stop listening to the banking sector and reinstate those acts – or something very like them. We know what to do, but the current government (and that includes the LibDems) don’t seem to have the will.

    As for the bonuses, the main reason that people want all that money is because they think it can buy their way out of the social contract. What they don’t want is publicity, so how about shining a spotlight on how the other half (sorry, 0.1%) actually live? Something to highlight the largely shallow and sorry lives that so many of them lead?

    • August 3, 2012 9:02 pm

      Matt – the Vickers Commission looked at total separation (a la Glass-Steagall) versus ring fencing and came down in favour of the latter.
      Re bonuses and enormous salaries – I entirely agree with you. Please have a look elsewhere on my blog for articles on high pay, tax avoidance and even the reaction to last years riots. Also should apply same spotlight to sports stars, tv presenters, etc.

      • Matt Nicholson permalink
        August 6, 2012 7:46 pm

        I’m afraid I disagree. Sports events, film and rock concerts make huge profits for the producers, and it is right that the stars that make them profitable should receive a substantial proportion of that profit – I have no argument with them. However bankers bonuses are a different matter, as they are not awarded by their customers for excellence, and indeed have little to do with their performance as responsible human beings at all.

  11. Kai permalink
    August 4, 2012 9:26 pm

    The shameful and criminal behaviour of the banking sector is so bad, that it may lead to the Freeconomy. Money has served its purpose – maybe now it is time it was scrapped. Most of any indididual’s modern day problems are to do with money, which divides people, and hinders much collaboration and acts of pure generosity.
    Imagine – if the money system was scrapped, due to it’s utter abuse amongst those who have amassed most of it, then it would automatically punish, exactly proportionately, those who have benefitted most from a corrupt system. Even those who would lose most, would gain something far better – a world where people took action based on sense and love instead of gain.
    The financial situation has reached such a pinnacle of ridiculousness, that it may lead to the utopian replacement, and thus benefit everyone.

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