Sunday 15 February 2009

What next for the banking system?

The banking sector seems to be, like a drunken man, lurching from one crisis to another. With the hapless government looking on as a bewildered bystander. After the latest losses at HBOS will the newly formed Lloyds group have to be taken into national ownership? The Royal bank group continues to announce further losses with resultant massive job losses. Is anyone looking at the bigger picture here? Everyone seems to agree that the existing banking model has run its course, but no-one seems to be planning for what will take its place. The government and the opposition seem to hope that the crisis will eventually die down and things can then go on with as little change as possible. Clearly they and their highly paid advisers have little idea of what has caused the meltdown.

As my dear mother used to say with increasing frequency, it's all down to greed. And she was right. Not simply greed in the sense of wanting more and more money, but greed in the sense of wanting to be more and more powerful. As someone once said, all power corrupts and absolute power corrupts absolutely. And of course as a result of the mad scramble to create ever bigger mega banks there were quite a few people with pretty near absolute power over the financial system. Which power they misused in spectacular fashion, bringing down not just themselves but millions of innocent bystanders as well. Talk about collateral damage. The rot started decades ago with the breaking down of the old distinctions between the different parts of the financial sector. Retail banks, investment banks, mortgage providers, insurance providers were all distinct sectors with very little overlap. Each had their own legal framework, which provided some sort of protection for the customers. However with the triumph of the neo-liberal ideology first under Thatcher and Reagan and then continued disastrously under New Labour, all these distinctions were thrown out in the name of liberalisation and free competition. This of course completely ignored the inconvenient fact that when left to themselves companies abhor competition and do their best to get rid of as many competitors as possible by buying up or merging with rivals. This type of expansion has nothing to do with organic growth so beloved of free market prattlers. So we ended up with a few mega big financial monoliths which were involved in all the previously distinct financial services. And of course in order to justify and pay for this expansion they had to change from institutions which provided financial services – bank accounts, mortgages, insurance etc – to those who needed it, to become market companies who had to aggressively sell more and more financial products to anyone and everyone, irrespective of whether they needed such products or not.

If as I suggest the current model is broke, then we need to think fast about what to put in its place. And any alternative needs to be based not on the failed neo-liberal ideology, but on an approach that puts serving people first. If some markets left to themselves proceed to monopoly or near monopoly then we either run these markets as public companies or we impose rigorous regulations to prevent concentrations of power and influence. If financial institutions are primarily about providing services to people and small businesses then there is no rationale for mega companies such as the new Lloyds group or the current Royal Bank group or Barclays for that matter. They should all be nationalised and then split up into smaller companies which can specialise in particular sectors, banking, mortgages, insurance etc. We also need to look at different models of ownership, which again may mean going back to the past. Some companies can be in the commercial sector, though strictly regulated, while others can be mutually owned as were the traditional building societies, while other forms of not for profit ownership can be developed. The creation of such a range of smaller companies each with their own Head Offices would additionally help to stimulate the economy over a wider geographic area. The current failed system has certainly provided enormous riches for a very few number at the top, the Fred Goodwins and his ilk, but is has not produced much in the way of benefits for the general public, either as individual customers or as small businesses. We need real change.

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