The Barclays scandal has underlined the financial
sector’s unmuzzled power. But it also offers a chance to take democratic
control.
The greatest danger of the rate-fixing
scandal now engulfing London’s financial sector is that it will be
managed and defused in the usual way, and nothing will really change.
The forced resignation of Bob Diamond, the Barclays chief executive,
follows well-worn procedures for dealing with crises that potentially
threaten those in power: denounce the worst offenders, let a few
symbolic heads roll, set up an inquiry under a safe pair of hands, and
tweak the regulations to prevent a repetition of the most egregious
misdemeanours.
That’s been the pattern of the past
few years as Britain’s establishment has lurched from the disaster of
the Iraq war to the disgrace of parliamentary expense fiddling and media
phone-hacking (though in the case of Iraq, the only heads to roll were
BBC executives and an army corporal). As for the banks that triggered
the greatest economic crisis for 80 years, they have been bailed out and
featherbedded, with only the loss of the odd sacrificial financial
sector baron to show for their reckless mayhem.
But
we can’t afford to allow such political dereliction again. The racket
revealed around the rigging of the crucial Libor inter-bank interest
rate — affecting $500tn worth of contracts, financial instruments,
mortgages and loans — has underlined the scale of corruption at the
heart of the financial system. It follows the exposure of the
mis-selling of dodgy derivatives and payment protection insurance,
voracious tax avoidance and last month’s breakdown of the RBS-NatWest
basic payments system.
It’s already clear that the
rate rigging, which depends on collusion, goes far beyond Barclays, and
indeed the financial sector. This is one of multiple scams that have
become endemic in a disastrously deregulated system with inbuilt
incentives for cartels to manipulate the core price of finance. Not only
that, but the rigging has been public for years — it was first reported
in 2008 — and no action has been taken until now.
That echoes the phone-hacking scandal, which erupted eight years after Rebecca Brooks told parliament News International
was bribing the police and her admission was entirely ignored. On July
3, Barclays sought to implicate the civil service in its rate-rigging in
2008, and an angry Diamond, fighting for a payoff of over GBP20m, can
be expected to go further before the Commons on July 4.
As they did with the Murdoch press, politicians who have abased
themselves before the financial elite are now denouncing corrupt bankers
and each other for failing to bring them to heel. David Cameron, whose
party relies on sector donors for more than half its income, wants a
narrowly Libor-focused parliamentary inquiry to avoid the bigger picture
and focus blame on New Labour’s enthusiasm for “light touch regulation”
in the runup to the crash.
Labour leader Ed Miliband
is rightly pressing for a much broader, Leveson-style public inquiry
into the entire banking system. But the reality is that the whole
political class embraced deregulated finance in the boom years. While
Tony Blair and Gordon Brown pampered the banks, financial minister
George Osborne and the Conservatives were demanding still less
regulation, and even the Liberal Democrat Vince Cable, now the bankers’
scourge, endorsed a financial “light touch”.
This is
yet another disgrace for the country’s governing elites. The new
revelation of corruption comes after the exposure of the deception of
the Iraq war, fraud in parliament and the police, the criminality of a
media mafia and the devastating failure of the banks four years ago. It
could of course have happened only in a private-dominated financial
sector, and makes a nonsense of the bankrupt free-market ideology that
still holds sway in public life.
Political and
business powerbrokers insist it’s all a problem of leadership, bad
apples and a culture that has gone awry. But such cultures are generated
by structures and systems — and in the case of the financial sector,
deregulated short-term profit maximisation has as good as required them.
It’s certainly necessary to have a clearout of sector bosses,
prosecutions and wide-ranging inquiries, but only far-reaching change
will clear this cesspit.
The financial system has
already failed at huge economic and social cost. It has been shown to be
corrupt, incompetent, rapacious and economically destructive. The
sector’s claims to be an indispensable jobs and tax engine for the
British economy are nonsense: the bailout costs of 2008-09 dwarfed the
financial tax revenues of the boom years, which were below those of
manufacturing even at their peak.
In fact, the banks
are pumped up with state subsidies and liquidity that they are still
failing to pass on in productive lending five years into the crisis. A
crucial part of the explanation is the unmuzzled political and economic
power of the financial sector: its colonisation of the civil service and
public life, effective grip on its own regulation, revolving-door pull
on politicians and civil servants, and purchase of political parties.
Finance has usurped democracy.
The crash of 2008
offered a huge opportunity to break that grip and reform the financial
system. It was lost. The system was left as good as intact, and even the
part-nationalised banks, RBS and Lloyds, have since been run at arm’s
length to fatten them up as quickly as possible for re-privatisation
(savage RBS cost-cutting lies behind its humiliating performance last
month), instead of as motors of investment and recovery.
The
rat-rigging scandal now offers a second opportunity to build the
pressure for fundamental change. That’s hard to imagine being carried
out by a coalition dominated by the sector-funded Tories, but Labour has
also yet to break fully with its pre-crisis economic model.
Tougher
regulation or even a full separation of retail from investment banking
will not be enough to shift the financial sector into productive
investment, or even prevent the kind of corrupt collusion that has now
been exposed between Barclays and other banks. As a report by Manchester
University’s Cresc research team argues this week, the size and
complexity of the modern banking system makes it “near ungovernable”.
Only
if the largest banks are broken up, the part-nationalised outfits
turned into genuine public investment banks, and new socially owned and
regional banks encouraged can finance be made to work for society,
rather than the other way round. Private sector banking has
spectacularly failed — and we need a democratic public solution.
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