John Mack (Morgan Stanley), Brian Moynihan ( Bank of America), Jamie Dimon (JP Morgan), and Lloyd Blankfein (Goldman Sachs) – these masters of the financial universe paraded before the US Congress yesterday to explain why their banks managed to bring world financial system to its knees and cause the worst slump in capitalist production since the 1930.
The explanation (and apologies) from these financial moguls was perfunctory and circumspect. Yes, maybe they had taken too many risks with other people’s money in buying and selling wacky and exotic financial assets based on home mortgages and financial derivatives; instead of getting on with what bankers are supposed to do: provide credit for businesses to invest and produce and households to buy goods and services.
But as the Goldman Sachs chief, Blankfein said, capitalism only works on taking risks to make profits: “taking risk completely out of the system will be at the cost of economic growth. We know from economic history that innovation requires risk taking “. Blankfein is the man who recently claimed that he was “doing God’s work” at Goldman Sachs.
As for the need to take risk in innovation; when it comes to ‘financial innovation’ an even more eminent financier than Blankfein would beg to differ. Paul Volcker was head of the US Federal Reserve Bank during the 1980s, when he ruthlessly crushed economic growth with high interest rates during the economic recession of 1980-2. He is now heading up President Obama’s Economic Recovery Advisory Board.
Volcker spoke recently to a conference in London called the Future of Finance Initiative. He told the assembled financial ‘innovators’ that, over the last 25 years, “there was not a shred of evidence” that financial innovation had made any contribution to economic growth. On the contrary, the banks by investing in credit default swaps, securitised debt, CDOs and other ‘innovatory’ financial products “took us right to the brink of disaster” Volcker went on to a stunned audience: “I do not want to stop you all from innovating, but do it within a structure that will not put the entire world economy at risk.”
Here Volcker was echoing the words of another financial star, Warren Buffett, the second-richest man in the world and regarded as the greatest investor of all time. Buffett did not mince words when he referred to that great financial innovation of Goldman Sachs, JP Morgan and the others, credit default swaps, as the “financial weapons of mass destruction”.
Testimonies like these make a mockery of the arguments of these bank chiefs in defending their actions. When all their great financial innovations went belly up and the financial system headed into meltdown, these bankers had to be bailed out by the state – namely you and me, the taxpayers. The taxpayer has stumped up funds equivalent to about 20% of the annual GDP of the US and Europe to provide new capital for the banks, buy up their bad investments, guarantee their loans, compensate them for losses incurred when others went bankrupt and keep the cost of borrowing money for the banks at all-time lows. It has been a bonanza for the banks, all in the name of saving the system.
Sure, President Obama now wants to levy a tax on these bank profits to pay back the taxpayer to the tune of $90bn (spread over ten years by the way). But that is a mere spoonful compared to the losses suffered in unemployment and bankruptcies of small firms and loss of homes for many Americans. And $90bn does not compared to the extra cost of servicing the huge increase in public sector debt in increased interest payments.
Sure, the state has equity ownership in some of these banks but at the cost of a huge public sector debt that it will have to serviced for the foreseeable future at the expense of higher taxation and poorer public services. And so frightened are governments, whether they are Democrats in the US or New Labour in Britain, of actually owning the banking system, that they are desperately looking at ways of handing over their shares to the bankers as quickly as possible. God forbid that the state should own and control the banking system !
But why not? Surely, the experience of the last two years shows that the banking system should not be the province of grotesquely overpaid executives to control in order to make huge profits for their shareholders and contribute (in the words of Volcker) nothing productive for society.
Old Karl Marx over 150 years ago did a pretty good job of explaining that the financial sector is a hugely unproductive part of a capitalist economy. If you want an analogy, the credit that banks provide is more like the oil that lubricates the pistons of a car. Oil makes the car run more smoothly, but it doesn’t make the pistons move. That requires the combustion of petrol (or the labour of people). Without lubrication, the car may quickly seize up, but the car won’t move just because it is well oiled. Indeed, you can have too much oil in the sump and flood the piston chambers.
Why can’t banks be publicly owned and controlled and operated as non-profit making bodies designed to provide credit to small businesses and citizens in those productive and necessary sectors of the economy? The answer is: they can – and they would work better and less wastefully than banking for profit.
Talking of grotesque salaries and incomes, the head bankers before Congress yesterday vigorously defended the squillions that they and their top executives got paid. One American banking analyst sort to defend them. It was right to resume the practice of paying bumper bonuses to bankers because “we have to pay revenue-producing employees well to keep them around and companies like Goldman Sachs and JP Morgan have made a lot of money through some very smart people”.
Smart people! Are these the same smart people who lost the banks nearly $2trn in bad investments in the previous two years? Sure, some of them have been ‘moved on’ but only with fat payoffs and ridiculously exorbitant pensions. But those bankesr who have paid the price for the risks taken by the ‘smart people’ have been the lower ranks and low paid banking staff in the likes Northern Rock or RBS. The ‘smart people’, by and large, are still being smart bankers.
And bank profits in 2009 were not up because of these smart people, but because of the huge injections of capital and funding that governments everywhere have provided. The banks are now charging high rates of interest on their loans while receiving funds free or very low rates. It’s a no-brainer making money in those circumstances.
So bankers are back to making huge profits at the expense of the productive sectors of economy and paying themselves massive incomes to congratulate themselves. As these bankers would say: Je ne regret rien! It’s business as usual.