Banking as a public service

It’s two years to the day since Lehman Brothers, one of the big five investment banks in the US, went bust and kicked off a financial collapse that nearly pushed the whole capitalist system into meltdown.  The strategists of capital don’t want to let that happen again, so they have been deliberating for months and months about how to avoid another such collapse.  Regulation has been the catchword answer.

This week, global banking regulators finally issued their report on how to control banks around the world.  It was called Basel-III (the third such attempt to do so over the last 20 years).  The president of the European Central Bank, Jean-Claude Trichet, acted as the leader for these national bank regulators.  He said that they had reached a compromise that satisfied the need for ‘more regulation’ without ‘strangling the banks’ so they could not function profitably.

What was the solution of these very worthy bankers?  They decided that the cause of the global credit crunch and the ensuing Great Recession was that the banks had taken too many risks in buying dodgy ‘assets’ like ‘sub-prime mortgages’ and other investments and did not have enough spare capital or cash funds on their books to cover the losses that hit them when everything went pear-shaped.

Under previous rules, banks needed to keep only cash and stock worth just 2% of all the risky assets they had on their books.  That was clearly not enough in the financial crisis of 2008-9.  Now banks were going to have to keep at least 4.5% in cash and equity with another buffer of up to 2.5% for safety’s sake.  And when things were going well and they started to make good profits, they were going to have to keep another 2.5% of assets in reserve for a rainy day.

Now this all sounds sensible and you may say not a moment too soon.  However, it won’t be soon.  So upset were the bankers on being told by the regulators that they must have more cash and shareholder capital in their banks to do business that they have been lobbying all and sundry to try and water down these new regulations.  And they have succeeded.  The new ratios for capital do not have to be met until 2015 at the earliest and in the case of some ratios not until 2018 or even 2023!  And in the meantime, they can keep all the public money that have received from the government and for guarantees on their own borrowing to tide them over.

Pretty good, eh?  What’s more, it looks as though attempts by the likes of Paul Volcker, ex-Federal Reserve president and Vince Cable, the UK’s Liberal Democrat business secretary (and many other financial ‘experts’) to break up the banks have been shelved.  Volcker wanted to split banking into two different bits: one part that just lends to the likes of you or me; and the other that can carry on speculating in financial markets.  Only the former would be backed by government.

The argument was that banks were getting ‘too big to fail’.  Namely that the likes of Citibank, HBoS, Bank America, Goldman Sachs etc were so large that if we let them go bust, they would bring down everybody, as Lehmans nearly did.  These banks were so big they could not be allowed to fail and had to be bailed out by the taxpayer.  And it was just these banks who received the bulk of government money in the crisis that the rest of us are now paying for through higher taxes and cuts in public spending.  The smaller banks were allowed to go bust (over 150 in the US alone).

These big banks knew they were too big to fail (the head of Lehmans, Dick Fuld could not believe it when the Federal Reserve did not save his bank), so they had a licence to go on speculating without any worry.  Volcker etc wanted to end this ‘moral hazard’.  If banks wanted to gamble, they would have to do it a smaller scale, small enough not to bring down the system.

But breaking up the banks would mean less profits and in those countries like Britain or the US where financial sector profits are so important, there was less than extreme enthusiasm to pursue the Volcker rule.

Instead, the regulators have decided that, as long as the banks keep a bit more of their cash and capital on their books, they can carry on as before speculating in financial instruments of ‘mass destruction’ (as billionaire mogul Warren Buffet described them), still using the deposits of the banks’ customers (i.e. our money).  After all, banks are commercial operations and must provide returns for their shareholders.

And it’s business as usual already (and will now be for another 5-13 years!).  Already the amount of transactions in the credit derivatives market (the one which spread the financial losses throughout the sector) is back to the same levels as before the crisis.  And the bonuses and perks of the bank directors and top traders are back at their previously grotesque levels.

But why should banks be commercial operations?  What is to stop us turning them into a public service just like health, education, transport etc?  Nothing is the short answer.  If banks were a public service, they could hold the deposits of households and companies and then lend them out for investment in industry and services or even to the government.  It would be like a national credit club.  If banks had been under public ownership and engaged only in a plan to provide funds for industrial investment, government infrastructure development and housing,the financial crunch would have been avoided (even if the Great Recession was not).

It is no accident, for example, that Brazil had a very mild recession because the government there plunged huge resources into its state-owned development banks for infrastructure spending.  China’s banks were ordered to do the same.  Speculation in financial instruments was avoided.

The answer to avoiding another financial collapse is not just more regulation (even if it was not watered down as the Basel III rules have been).  Bankers will find new ways of losing our money by gambling with it to make profits for their capitalist owners.   In the financial crisis of 2008-9, it was the purchase of ‘subprime mortgages’ wrapped up into weird financial packages called mortgage backed securities and collateralised debt obligations, hidden off the balance sheets of the banks, which nobody, including the banks, understood.   Next time it will be something else.  In the desperate search for profit and greed, there are no Promethean bounds on financial trickery.

One alternative or addition to regulation that has been proposed is a financial transactions tax.  This was first suggested by the left Keynesian economist James Tobin. He saw it as a way of raising funds for reserves in any financial crisis and as a method of dampening down ‘volatility’ in financial markets, specifically currencies.  Such a tax has been anathema to the bankers and supporters of ‘light touch’ regulation.  No surprise there.  More important, it would not achieve its objectives.   Unless applied globally, it would only lead to a flight of capital to non-tax areas.  And there is now a fair body of evidence from the experience of trying to apply it in Sweden in the early 1990s that it did not stop speculation or volatility.

Don’t the same arguments against a financial transactions tax also apply to public ownership of the banks and making them a public service?  If this is implemented in, say the UK, won’t all these global banks just flee the country for Switzerland, Bahrain or the US.  This is a nonsense argument.  For example, most of what the British public and small firms need in the way of credit services would not disappear.  After all, two of the biggest banks in the UK are already partially publicly-owned (although the bankers are allowed to do what they want) and their speculative businesses have been curtailed.  They cannot ‘leave the country’.  If the likes of Goldman Sachs or even HSBC were to go, that would be no loss of service.

The lesson of the collapse of Lehmans, Bear Stearns, Northern Rock and several others is that banks under capitalism operate to make money from money by whatever means.  That inevitably leads to financial ‘episodes’ that can even destroy the ‘real economy’.  Only public ownership with banking as a public service can avoid that.

3 thoughts on “Banking as a public service

  1. Banking Service always works for Public, without customers bank is no more! Nice Content about banking & public service. Thanks for such a valuable post.

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