New financial regulations will harm households and small businesses

The financial sector breathed a sigh of relief this week as the Basel Committee’s recommendations for new rules on banking regulations were announced; stock markets around the world rallied. Rules on the amount of capital banks must hold to cover risk – and the extent to which reserves must be liquid – are less stringent than expected.

The financial sector breathed a sigh of relief this week as the Basel Committee’s recommendations for new rules on banking regulations were announced; stock markets around the world rallied. Rules on the amount of capital banks must hold to cover risk – and the extent to which reserves must be liquid – are less stringent than expected.

Should the left be annoyed? Shouldn’t the banks be hit harder for causing the recession and compelling taxpayers to bail them out on a massive scale?

It would be easy to answer yes. In welcoming the news, Bank of America chief-executive Brian Monyihan was quoted as rejoicing that “there is a need to strike a balance against losses while not harming future prosperity”. This is a false and arrogant dichotomy – Monyihan wants us to believe that there is a zero-sum trade-off between stability and prosperity.

Tougher rules, so the argument goes, would have made the global financial system more resilient, but at the price of prosperity given that banks’ ability to invest at will would have been curtailed. This is evidence of an incredibly short memory: it wasn’t Basel III that caused the economic downturn. In fact, it was the absence of regulation on banks that led the world economy to the brink of depression.

However, the weakness of Basel III should not be exaggerated. The main concession from the committee was simply that regulations will be phased in. The rules will involve significant change for many banks. Their profitability will be undermined, meaning that they are less attractive to investors, and their employees’ bonuses probably won’t be quite as vulgar.

And crucially, the cost of banking will now rise. Generally speaking, taking out a loan or a mortgage will be more expensive, even as the economy recovers, and savings products will be less generous. If the rules had been stronger, the cost of banking would have risen even further.

This is a genuine quandary for the left in the post-New Labour era. The Labour government’s vision of welfare was essentially an updated version of Margaret Thatcher’s property-owning democracy. Built on what Peter Malpass terms the ‘wobbly cornerstone’ of the housing boom, New Labour sought to achieve asset-based welfare.

We should all own homes and invest our savings, entangling our welfare fundamentally with the financial system. Alan Finlayson has defined New Labour’s approach as the ‘financialisation’ of welfare, citing the ill-fated Child Trust Fund, which locked our children into the financial system from birth, as a key example.

If the cost of banking rises, financial inclusion for ordinary people will become even more difficult. This is not to say we should bemoan the end of asset-based welfare: the financial crisis which led to Basel III put an end to the fantasy land within which New Labour’s policies were pitched.

But what is the alternative vision? Such questions have not been raised at all during the Labour leadership election. Candidates have been generally supportive of tougher restrictions on banks, but none have wondered what this means for low-income people if they can’t get a mortgage or make money from their savings – or if small businesses can’t raise capital.

The only candidate really able to even get his head around all this, Ed Balls, was of course centrally involved in dreaming up asset-based welfare in the first place.

11 Responses to “New financial regulations will harm households and small businesses”

  1. Aisha Gani

    RT @leftfootfwd: New financial regulations will harm households and small businesses: //bit.ly/cjMdHz

  2. Shamik Das

    New financial regulations will harm households and small businesses: //is.gd/fbBFA writes ex-Treasury wonk Craig Berry on @leftfootfwd

  3. Ash

    I must confess that this article has me scratching my head. The general thrust seems to be that ordinary people shouldn’t own anything very valuable or put any money in banks, because that just ‘locks them into the financial system’ and means their welfare is ‘entangled’ with that system.

    What I’m not getting, though, is why the welfare of an asset-free individual is, ultimately, any less entangled with the financial system than that of a wealth-holding individual. It’s not as if council tenants with no savings are somehow immune to upsets in the financial system, is it? If anything they’re in a worse position to weather the storm resulting from such upsets than those of us who have assets that have dropped in value.

    And what is the alternative to ordinary people having assets and savings? Is the suggestion that all wealth should be in the hands either of a small, elite group of private individuals, or of the state, with the asset-free masses renting their homes and having just enough money to live on?

  4. Gabi Urse

    New financial regulations will harm households and small … //bit.ly/dlJn4k

  5. Craig Berry

    Ash – you make some good points, although misrepresent the ‘general thrust’ of my article. I did not say ordinary people should not own anything which involves interaction with the financial system. The point is that New Labour told us welfare was dependent on acquiring financial assets. If the left is to support new banking regulations for the sake of stability, it is therefore necessary to rethink how people can ‘get on’ now that the cost of banking could be much higher. Nor did I say that people with no financial assets are immune from financial crises. The point is that New Labour told us financial assets would provide welfare – they haven’t, in fact they have been a source of insecurity for many people. Do you really think I am suggesting everyone but a small elite should have no assets or financial assets? If the left cannot imagine alternatives between the scenario you outline and a form of welfare where our economic security is the mercy of the financial sector, then we really are in trouble.

  6. Ash

    Craig –

    Sorry if I’m appearing to put words into your mouth; I’m just trying to tease out the implications of the points you make, given that you’re intentionally refraining from putting forward your own alternative to ‘asset-based welfare’.

    I know you didn’t explicitly say that ‘people with no financial assets are immune from financial crises’, but you did seem to be implying that ‘entangling our welfare fundamentally with the financial system’ is something we choose to do when we buy a home or invest our savings. That implies that we could equally choose *not* to entangle our welfare with the financial system by refraining from doing so. I suppose what I’m saying is just that our welfare seems to be pretty well entangled with the financial system whatever we do!

    “The point is that New Labour told us financial assets would provide welfare – they haven’t, in fact they have been a source of insecurity for many people.”

    Well – better (surely?) the insecurity of owning £200,000 of assets that might halve in value than the security of having nothing to lose?

  7. Matthew Lloyd

    New financial regulations will harm households and small … //bit.ly/cKrwbV

  8. Matthew Lloyd

    New financial regulations will harm households and small … //bit.ly/b08Oum

  9. Craig Berry

    Ash – fair point that I haven’t offered a specific alternative. Forgive me, but I don’t think an article about Basel III is really the right place. To be clear, however, of course in our current economic circumstances, the people who can’t afford to own their own home (ie take out a mortgage) are, generally speaking, worse off than those who can. But (a) plenty of people who bought homes in recent years now wish they hadn’t, and (b) our ambitions as progressives should not be limited by comparisons to a worst case scenario. Having anything may be better than having nothing, but shouldn’t we give a bit of thought to what that ‘anything’ is? In terms of asset-based welfare, the ‘anything’ has caused new forms of insecurity. In any case, with the cost of banking due to rise, it’s no longer a viable approach to welfare.

  10. LeftCentral’s review of the week « LeftCentral

    […] have been tougher but will still mean significant changes to the way that banks do business.  Questions have been raised about what a new, safer banking system means for the less well-off in society.  New Labour pinned […]

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