Financial crisis 2.0
The Vickers’ banking report is another fix to the broken capitalist system
Three years after the great financial crisis of a half century and with western economies fast running out of fixes to kick start economic growth the British Government has published recommendations to evade another such crisis.
In the main the report proposes that banks should ‘ring fence’ their high street customers from their high value corporate and government customers to protect the tax paying public from future baking failures like Lehman Brothers. Also, banks should hold more liquid (less profitable) capital reserves to help against another liquidity crunch which caused the banking system to seize up with a run on the likes of Northern Rock.
The fundamental error in the recommendations is that it presupposes that future crises will be much like the one in 2008. If another crisis ensues but from different causes – the system remains as vulnerable as before.
On the detailed recommendations it’s clear that enormously destructive investment banking transactions – the great majority of the business of investment banks – that serve no productive purpose in the real economy except as money gambles were seen as too politically risky to ditch altogether.
Indeed, high street customers – the public and SMEs – will pay a higher price for banking services so that corporate customers and the super rich can continue to play casino, with the system now disarmingly susceptible to a crisis.
Three issues mean banks will remain highly vulnerable in spite of proposals which will not be implemented until 2019:
Firstly, in spite of the proposed 2-3 fold increase in tier 1 capital reserve ratios less the one in 10 pounds of banking liabilities will be covered by ‘secure’ assets – an equation that would be unviable and unacceptable in any business.
Secondly, nothing has been done to unwind the derivative liabilities time bomb which is so enormous that it exposes the whole financial system even though ‘ring fenced’ banks will not be able to undertake many, but not all, derivatives transactions.
Thirdly, the idea of an unbreakable fire wall between ring fenced banks and those outside the ring fence is frankly false in banking which by definition pervades the whole capitalist economy. The contagious meltdown of 2008 affected the whole system even those banks with little exposure to investment banking due to knock on affects in the economy and the foreseen consequences.
In light of the economic and political not to mention the social costs of the financial crisis which continue to impose a heavy burden on western economies these proposals are flawed and will not be implemented for another 8 years (over a decade after the crisis first ensued) providing the banks with plenty of time to lobby in order to dilute their limited impact. Despite the political hyperbole about cutting bank bonuses and reforming the sector this financial crisis has exposed the political strength and patronage of the banks: it took just a weekend to bail them out to the tune of hundreds of billions but will take 10 years to get any sort of retribution.
The capitalist system is adept at fixes but we’re at a point in the crisis where the rescuers (governments) need rescuing. This is the dire back drop to the widely acclaimed (across the political spectrum) Vickers’ report and exposes just how woefully inadequate has been the response.