This election, and more importantly its aftermath, will be defined by the economy, with the incoming government facing some unpalatable choices & spending cuts.
This election, and more importantly its aftermath, will be defined by the economy. The last two years have seen the UK teeter on the edge of financial collapse, narrowly avoid depression and tentatively emerge from the downturn backed by unprecedented fiscal support. Now the incoming government faces the unpalatable choices of rapidly reducing government spending across the full spectrum of public services and/or raising taxes. Given the economic stability and benign growth of the last two decades, this period in our recent history has been truly remarkable.
In the midst all of this excitement, it is unfortunate that our politicians, media and commentators appear to have lost interest in the underlying, fundamental cause of all of these difficulties – the banks. It is important to remember that the reason budgets for schools, hospitals, the military, the police and so on are at risk is due in large part to the behaviour, and structure, of the national and global financial systems.
Banks took risks they shouldn’t have. We all did. But whereas an individual can go bankrupt without forcing their entire street into financial ruin, the banks had become so enormous that they simply couldn’t be allowed to fail. Their complexity and interconnectedness grew to such proportions that bankers themselves no longer understood how the failure of one might impact another. Therefore governments around the world felt that they had no choice but to bail the banks out to the tune of trillions of dollars, or risk global catastrophe.
It would be sensible to try and avoid such a situation arising again. Despite all of our political parties superficially committing to financial reform, it is clear that the appetite amongst much of the political class to seriously change the way banking is conducted in this country and in the western world is weak – matching the policy response.
The Conservatives want to copy what are generally regarded as an impotent set of reforms currently being debated in the US. Their most radical suggestion is to shut down the FSA; in a complete waste of time, money and effort the Tories would move its responsibilities to the central bank, with the likely result of the entire FSA staff simply moving into temporary offices attached to the Bank of England.
The Labour Party has raised taxes on bonuses, but has avoided doing anything substantial that might upset the big banks – perhaps unsurprising since the government now owns most of them. The Liberal Democrats have been the most radical in their proposals throughout the crisis, arguing that banks should be split up into smaller entities to ensure that if a bank fails, it is not so important to the functioning of global finance that the rest of the world is put in peril – see these previous posts for the background to this and for further reading.
Unfortunately the Lib Dems have failed to provide anything resembling a plan of how they would implement these eminently sensible but nonetheless substantial reforms, casting doubt of their ability to deliver in government, and almost as vacuous as ‘cutting waste’ is the triple-parroted phrase ‘tougher regulation’ – peel under the surface and there is absolutely no detail.
The inability of all politicians to understand, articulate or effectively defend the essential need to break banks up into smaller, manageable entities has been one of the election’s great disappointments. The fact is that as things stand, the UK faces the same – if not a greater – risk of financial collapse than it did in 2008.
Banks are bigger than before. They are just as complicated. Bonuses are as ludicrous as they were at the height of the boom, and, crucially, bankers know that if they get into trouble, the taxpayer will bail them out. Capitalism like this – where failure provokes no fear, and where the market is dominated by a few players – is not capitalism at all. It is an oligopoly, a cartel, a racket, with the earnings of the many supporting the excesses of the few.
Sadly, as the campaign draws to a close, it is becoming all too clear that competition-driven banking reform – the kind that would go a long way to protecting us all from being held to ransom by the richest few in the future – is not forthcoming. It appears that very few politicians even understand the financial system, never mind trying to reform it. Of those that do, many have vested interests in ensuring the survival of its current form, usually as sources of personal or party income.
And the lobbying and influencing power of the top bankers is on a par with the great oil companies, stifling efforts to make banking the public service it should be. So it is that we move into a new political era, one likely to be full of austerity and economic insecurity, without any real efforts being made to address the underlying cause of the whole mess. No grounds for optimism on this front.
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