Ten years on from the financial crisis of 2007, not a lot has changed.
It is now ten years since the banking crash and despite a lot of rhetoric and posturing, there has been little substantive change. Are you ready for next crash?
The seeds of the 2007 crash were sown by neoliberal ideologies which promoted light touch regulation, control by markets, self- interest and unbridled competition. Banks designed clever financial products which even they themselves did not fully understand and for good measure also indulged in tax dodging, money laundering and interest rate rigging. Has anything changed?
People bailed out banks and accepted a large dose of austerity and loss of hard-won social rights whilst corporate executives collected large pay packets. In 1976, workers’ share of GDP in the form of salaries and wages stood at 65.per cent, but by 2016 it shrank to 49.5 per cent (see Table D of the UK Quarterly National Accounts). Between 2007 and 2015, the real wages of UK employees fell by over 10 per cent, almost the largest fall among major industrialised nations. 40 per cent of the working-age population have less than £100 in savings. Personal debt now stands at record £1.529 trillion. None of this has forced new thinking as neoliberal ideologies remain in ascendancy.
Banks and major companies continue to pile into derivatives. These are essentially clever bets on the movement of interest rates, price of commodities, exchange rates and everything else. Well, we know that all financial horses can’t win all of the time and someone will sooner or later have a great fall. 25 major banks have total assets of around $1.8 trillion, but their exposure to derivatives is about $222 trillion. To put this in perspective, global gross domestic product (GDP), or the total market value of all final goods and services produced in all countries, is about $78 trillion. This rush for speculative profits won’t have a happy ending.
Red flags have continued to be raised. In 2011 the Vickers Commission recommended that to contain future banking crises and protect savers and taxpayers, there should be a forced statutory separation of retail banking and speculative banking. The government has failed to follow the advice and instead in 2019 we may or may not have some kind of a weak ring fencing of the two banking operations. The government remains ambivalent towards derivatives.
The UK had a secondary banking crash in the mid-1970s and a banking crisis in each decade ever since. Bank of England (BoE) failed miserably as a financial regulator. For more than half a century, financial businesses have mis-sold mortgages, endowment policies, insurances and much more. BoE did little as regulators were too closely connected with the City. In 1991, the fraud-infested Bank of Credit and Commerce International (BCCI) was forcibly closed. It was the biggest banking fraud of the twentieth century but to this day there has been no independent investigation. Successive governments have gone out of their way to suppress information about the frauds. Is it possible to strengthen regulation without independent investigation of failures?
The 1997 Labour administration of Tony Blair replaced the BoE with Financial Services Authority, but all under the control of banking grandees who were too close to the industry. Light touch regulation continued. After the 2007 banking crash, the Conservative government handed the responsibility for policing the finance industry to the Financial Conduct Authority and prudential regulation of financial firms to the Prudential Regulation Authority, all under the umbrella of the BoE. The regulatory deck chairs have been rearranged, but banking grandees remain in control.
The 2007 crash revealed that bank auditors were asleep on the job. Accounting regulators looked the other way. HBOS ran into difficulties in 2007 and it is in June 2016, after considerable parliamentary pressure, that the Financial Reporting Council (FRC) announced that it will look into audit failures at the bank. The FRC is still a regulator.
Rather than directly auditing the banks, regulators continue to rely on auditors to alert them of any financial problems ahead. In the era of instantaneous movement of money, reliance on ex-post audits is highly questionable. Annual corporate accounts are supposed to inform shareholders of corporate wealth accumulation and cannot tell the regulators a great deal about the health and risks of the financial system as a whole. Yet they remain a central feature of the regulatory approach.
The 2013 report of the Parliamentary Banking Standards Commission concluded that “shareholders failed to control risk-taking in banks, and indeed were criticising some for excessive conservatism”. The Commission urged the government to consult with a view to changing the company law and “remove shareholder primacy in respect of banks, requiring directors of banks to ensure the financial safety and soundness of the company ahead of the interests of its members”. Yet there has been no change to the shareholder centric model of corporate governance.
George Santayana once said that “Those who do not learn history are doomed to repeat it”. The difficulty here is that the price of indulging the financial sector will continue to be paid by innocent people.
Prem Sikka is Emeritus Professor of Accounting at the University of Essex. He tweets here.
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9 Responses to “‘Those who do not learn history are doomed to repeat it’ – Are you ready for the next crash?”
Michael
Karl Marx wrote that all great events and personages in History occur twice: the first time as tragedy, the second time as farce.
Blade Runner
I’m sure a big capitalist crash is on the cards…probably before the nuclear holocaust
Will
As long as we remember that there is no money in the world, just bits of paper with “I promise to pay the bearer the sum of”.
In other words, lots of “I Owe Yous” but nothing to back it all up with as there is nothing out there except false promises.
Of course the whole system will crash, there is nothing to hold it all together.
Sanjay Mittal
Will,
So you object to paper money and want to go back to the gold standard or something? Very out of date I’m afraid. Only about 1% of economists favour the gold standard.
Bank instability results from the fact that private banks are allowed to create or “print” money. Milton Friedman and several other Nobel laureate economists opposed private money printing. Positive Money continues the fight for the abolition of privately issued money.
Douglas Andrew Town
Just as we are not allowed to gamble by purchasing life insurance on the lives of strangers, so options, futures and other derivatives should be more tightly controlled . For example, unless we are physically able to sell and distribute commodities, we should not be allowed to buy derivatives based on them.
I often wonder where the derivatives market ends and the bucket shop begins.
As defined by the U.S. Supreme Court, a bucket shop is “[a]n establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in.”[Wikipedia – Bucket shop]
The difference between the two seems to have more to do with the volume of the betting and the social class of the gamblers than the nature of the business itself.