Is finance fit for purpose?

That was the question addressed by Yanis Varoufakis (YV) and Anastasia Nesvetailova (AN) at the next in the series of New Economics lectures organised by the British Labour Party.  Both speakers are members of Labour’s Economics Advisory Council which includes luminaries like Joseph Stiglitz and Mariana Mazzucato.

The question posed could have been answered simply.  The financial sector in the UK and elsewhere does little or nothing for the majority of people in providing loans and support for businesses and households.  From that point of view, finance is not ‘fit for purpose’ as the global financial crash proved.  Instead, the City of London and Wall Street operate to make ‘money out of money’ through ‘financial engineering’ in the world of “the casino”, as YV quoted Keynes in his address.

Our first speaker, AN, who is a professor of political economy at the City University in London and an expert in financial economics, recognised that finance is not fit for purpose in the sense that it is mostly engaged in reckless speculative activities.  But according to AN, banks are no longer the culprits; it is the non-banking sector (i.e. financial institutions that don’t take customer deposits) like investment banks, hedge funds and private equity.  They operate through opaque networks that cannot easily be regulated.  AN reckoned that regulation of banking did not work before the Great Crash.  But the revised and improved international regulations, as in Basel 3, only deal with the banks and not the large ‘shadow banking ‘sector that operates without the restraints of collateral and capital requirements.  So we now have ‘too much’ regulation of the banks to the point that they cannot operate with loans for investment and growth but still no proper regulation of the non-banking finance sector.

What’s the answer?  According to AN, what we need is ‘smart regulation’.  Apparently this meant getting ‘independent’, ‘non-ideological’ expert regulators who knew what they were doing.  However, as AN admitted, this did not look likely to emerge.  Indeed, AN seemed to suggest that as the UK’s financial sector was so important and we could not do without it, and as regulation could not work with all the forms of financing, then we would have to live with the finance sector as it is – at least until ‘smart regulators’ came along.

YV was more forthright in telling the audience that, yes, finance was more complex now, but what was needed was to separate ‘plain vanilla envelope’ banking that provided finance for homes and businesses from ‘speculative investment’ banking using derivatives and other financial ‘innovations’ to make money and which eventually caused the banking collapse.  YV’s form of regulation was to raise the capital requirements of the banks to very high levels (say, 20% of assets compared to 3-4% now) so that they could not engage in speculation and also use the law to separate off the speculative activities of banks, as the Glass-Steagall Act had done in the US (but later abolished by the likes of Larry Summers under President Clinton in 1999).  This would protect the taxpayer from future crashes.  This contrasted with AN’s view that such regulation would bring the finance sector to a halt.

AN said that finance was necessary for an economy to grow.  This comment seemed surprising: of course, finance and credit is necessary for investment – houses cannot be paid for in one go and investment projects cannot always be funded in one year.  But do banks in Britain do anything useful in this regard?  British banks have loans outstanding worth about 160% of UK GDP.  But 35% of these loans went to other financial institutions, 42.7% went to households for mortgages and another 10.1% went to commercial real estate and construction. Manufacturing received just 1.4% of the total!  UK banking’s principal activity is just leveraging up existing property assets.

I was surprised that neither Varoufakis nor Nesvatailova mentioned the work of current Bank of England deputy governor, Andy Haldane.  He has shown in various studies the unproductive nature of finance capital. Finance “could [not] be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape. For that reason, statisticians do not count these activities in capital markets as contributing to activity or welfare. Rightly so.” (Haldane).

The truth is that the likes of Goldman Sachs, JP Morgan, Merrill Lynch and the investment banking wings of the big banks along with the hedge funds and asset management companies offer no value whatsoever.  They are just giant betting machines sucking up the funds of households and productive sectors to make money.  The best thing would be to take them over, close them down and ‘restructure’ their wildly overpaid staff into useful work in proper banking or other industries.

But no, both speakers assumed that the task was to ‘regulate’ the finance sector to make it ‘fit for purpose’.  What we were offered by the speakers was either ‘smart regulation’ (AN), whatever that might really mean, or ‘Chinese walls’ between lending and speculation (YV), harking back to the days of Fed chief Volcker in the 1980s and more recently to the Vickers report on UK banking.

There was no mention of turning the financial sector into a service for the people, like the health service or public transport.  And there was no mention of the best and only method to achieve that – not ‘regulation’, but through public ownership and control of banking and major financial institutions. Indeed, back in 2013, when discussing what to do about the Cypriot banks that were on their knees during the debt crisis then, YV advocated taking over the banks with taxpayers money and then, once they were back on their feet, selling them off again to private investors i.e re-privatising them.

This is exactly what the British Conservative government is doing now with the partly-nationalised failed banks of RBS and Lloyds that the government was forced to take over in the bailout of 2008.  The only difference was that YV would only sell them off at a profit, while the current UK government is selling them off at a loss to the taxpayer.  But YV still opted for fixing up the banks and then putting them back into the hands of private profit.

Contrary to ‘regulation’, in this blog and elsewhere I have presented the case for a publicly-owned banking and financial system to provide a proper service for people, without speculation and without grotesque salaries and bonuses.  See my paper to the Slovenian Labour Institute and the pamphlet for the UK’s Fire Brigades Union on the banks.  That would make the finance sector ‘fit for purpose’.

But public ownership and control is still ignored even in the leftist debates of New Economics, it seems. Nevertheless, as the City of London Corporation hosted the event (!), at least we got free wine and canapés afterwards.

7 Responses to “Is finance fit for purpose?”

  1. Choppa Morph Says:

    The real question of course isn’t “public ownership” or the fitness of Big Finance, but social ownership by a workers’ state, ie a revolutionary socialist alternative for society and the economy. As long as we pussyfoot around this big question, the myriad kaleidoscopic tendencies and factions within the bourgeois state’s ideological horde (a modern-day Golden Horde), from Varoufakis to Friedman, will continue to play patacake with each other and shake the kaleidoscope a little bit so we can spend ages analysing each new pattern – but it’s still the same rotten phosphorescing bits being shaken around.

    The solutions aren’t to be found within the system – it’s like trying to answer questions about the planets and stars within the power structure and ideological machine of the Catholic Church in the late Middle Ages.

    We need to set our agenda and ask our own questions the way Marx did – combining politics and economics and refusing to accept the continued existence of capitalism as a prerequisite for any serious discussion.

    Given the institutional preconditions in universities and academic discourse this isn’t at all easy. But it has to be done. The bourgeoisie is always trying to institutionalize and straitjacket theory and it enjoys overwhelming hegemony. In football terms it has over 99% possession and monopolizes the whole pitch. But that’s only because the agents of history and social change (the working class and the poor rural masses) are in chains and can only hobble around even if they are able to set foot on the field of play. And their managers (the “lefts”) only try to make their fetters a bit more comfortable (“let us wrap some rags round that jagged rusty iron for you”) instead of unlocking them and turning the chains into weapons.

    However necessary it is to engage with bourgeois economists from pink to ultraviolet, it is even more necessary to make this big picture perspective clear on each and every occasion, so we never forget the historical truth that capitalism is dying on its feet, and that this rotten mode of production is being forced to expend more and more of our common social production and wealth on the futile task of keeping socialism in the womb of human society – or where bits of it have already poked out (the USSR, China, say) to try and chop it up and stuff it back into the womb again….

    Because this blog of Mike’s is based on orthodox Marxist fundamentals – praise be! – this revolutionary historical perspective is always implicit – which makes it one of the most useful reads on the net. But it wouldn’t hurt, to say the least, if the political and particularly the historical (transition between modes of production) framework was much more explicit.

  2. Boffy Says:

    “They are just giant betting machines sucking up the funds of households and productive sectors to make money.”

    I agree entirely, its why QE by inflating such asset prices bubbles, and providing a floor beneath them has turned such speculation into a huge black hole that sucks liquidity out of general circulation, depressing economic activity and deflating commodity prices, and consequently restricting economic growth.

    “Contrary to ‘regulation’, in this blog and elsewhere I have presented the case for a publicly-owned banking and financial system to provide a proper service for people, without speculation and without grotesque salaries and bonuses.”

    The question being who would implement this programme. It seems like just a rehash of the old Militant “nationalise the 200 top monopolies” reformist programme of the 1970’s and 80’s. We have had nationalisation under many forms in the past implemented by both Labour and Tory governments, and on no occasion has workers control been a likely possibility. Kautsky long ago explained why a capitalist state will never implement nationalisation in workers rather than in capital’s interest, and Trotsky in the 1930’s, explained that the demand for such nationalisation outside a revolutionary situation was a cruel deception of the workers, because outside a revolutionary situation, the bourgeoisie would never concede real workers control.

    The more revolutionary solution at the moment is for workers across Europe to take over the banks themselves, or establish their own worker-owned co-operative banks ( the trillions of Euros in workers pension funds across the EU would be a good capital base for such banks).

    • Henry Says:

      “Trotsky in the 1930’s, explained that the demand for such nationalisation outside a revolutionary situation was a cruel deception of the workers”

      Behind this statement is the acknowledgement that all bourgeois political parties are just that, bourgeois political parties. So, for example, if the Labour party UK adopted a policy to nationalize the top 200 companies this would be reformist and a ‘cruel deception’ because the Labour party UK are a party of cruel deception, i.e. a party claiming to represent workers but in fact being representatives of the bourgeois.

      In a revolutionary situation the Labour party UK would not exist?

      I am sure this is all contrary to previous statements by Boffy. Not the antagonism to nationalization but the illusions in the Labour party.

  3. symbish Says:

    Thanks for your blog. It helped me remember some of the details of the talk! I’ve written my own write-up as well and would value comments.

    https://symbish.wordpress.com/2016/04/01/thoughts-on-is-finance-fit-for-purpose/

  4. jim drysdale Says:

    Is finance fit for purpose?

    michael roberts writes
    That was the question addressed by Yanis Varoufakis (YV) and Anastasia Nesvetailova (AN) at the next in the series of New Economics lectures organised by the British Labour Party. Both speakers are members of Labour’s Economics Advisory Council which includes luminaries like Joseph Stiglitz and Mariana Mazzucato.

    The question posed could have been answered simply. The financial sector in the UK and elsewhere does little or nothing for the majority of people in providing loans and support for businesses and households. From that point of view, finance is not ‘fit for purpose’ as the global financial crash proved. Instead, the City of London and Wall Street operate to make ‘money out of money’ through ‘financial engineering’ in the world of “the casino”, as YV quoted Keynes in his address.

    Our first speaker, AN, who is a professor of political economy at the City University in London and an expert in financial economics, recognised that finance is not fit for purpose in the sense that it is mostly engaged in reckless speculative activities. But according to AN, banks are no longer the culprits; it is the non-banking sector (i.e. financial institutions that don’t take customer deposits) like investment banks, hedge funds and private equity. They operate through opaque networks that cannot easily be regulated. AN reckoned that regulation of banking did not work before the Great Crash. But the revised and improved international regulations, as in Basel 3, only deal with the banks and not the large ‘shadow banking ‘sector that operates without the restraints of collateral and capital requirements. So we now have ‘too much’ regulation of the banks to the point that they cannot operate with loans for investment and growth but still no proper regulation of the non-banking finance sector.

    What’s the answer? According to AN, what we need is ‘smart regulation’. Apparently this meant getting ‘independent’, ‘non-ideological’ expert regulators who knew what they were doing. However, as AN admitted, this did not look likely to emerge. Indeed, AN seemed to suggest that as the UK’s financial sector was so important and we could not do without it, and as regulation could not work with all the forms of financing, then we would have to live with the finance sector as it is – at least until ‘smart regulators’ came along.

    YV was more forthright in telling the audience that, yes, finance was more complex now, but what was needed was to separate ‘plain vanilla envelope’ banking that provided finance for homes and businesses from ‘speculative investment’ banking using derivatives and other financial ‘innovations’ to make money and which eventually caused the banking collapse. YV’s form of regulation was to raise the capital requirements of the banks to very high levels (say, 20% of assets compared to 3-4% now) so that they could not engage in speculation and also use the law to separate off the speculative activities of banks, as the Glass-Steagall Act had done in the US (but later abolished by the likes of Larry Summers under President Clinton in 1999). This would protect the taxpayer from future crashes. This contrasted with AN’s view that such regulation would bring the finance sector to a halt.

    AN said that finance was necessary for an economy to grow. This comment seemed surprising: of course, finance and credit is necessary for investment – houses cannot be paid for in one go and investment projects cannot always be funded in one year. But do banks in Britain do anything useful in this regard? British banks have loans outstanding worth about 160% of UK GDP. But 35% of these loans went to other financial institutions, 42.7% went to households for mortgages and another 10.1% went to commercial real estate and construction. Manufacturing received just 1.4% of the total! UK banking’s principal activity is just leveraging up existing property assets.

    I was surprised that neither Varoufakis nor Nesvatailova mentioned the work of current Bank of England deputy governor, Andy Haldane. He has shown in various studies the unproductive nature of finance capital. Finance “could [not] be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape. For that reason, statisticians do not count these activities in capital markets as contributing to activity or welfare. Rightly so.” (Haldane).

    The truth is that the likes of Goldman Sachs, JP Morgan, Merrill Lynch and the investment banking wings of the big banks along with the hedge funds and asset management companies offer no value whatsoever. They are just giant betting machines sucking up the funds of households and productive sectors to make money. The best thing would be to take them over, close them down and ‘restructure’ their wildly overpaid staff into useful work in proper banking or other industries.

    But no, both speakers assumed that the task was to ‘regulate’ the finance sector to make it ‘fit for purpose’. What we were offered by the speakers was either ‘smart regulation’ (AN), whatever that might really mean, or ‘Chinese walls’ between lending and speculation (YV), harking back to the days of Fed chief Volcker in the 1980s and more recently to the Vickers report on UK banking.

    There was no mention of turning the financial sector into a service for the people, like the health service or public transport. And there was no mention of the best and only method to achieve that – not ‘regulation’, but through public ownership and control of banking and major financial institutions. Indeed, back in 2013, when discussing what to do about the Cypriot banks that were on their knees during the debt crisis then, YV advocated taking over the banks with taxpayers money and then, once they were back on their feet, selling them off again to private investors i.e re-privatising them.

    From: Jim Drysdale.
    Yanis Varoufakis, and he is not alone, ignores (or more likely, does not understand) the overwhelming evidence that the crisis of capital, capitalism, capitalist society deepens. i.e., the decline of capital. YV is a present day example of why Marx declared that he was not a Marxist. And, as it was then, is now, many who say that they are Marxists fail to understand Marx. Many so-called left academics certainly have a good life from not being too controversial. Lazy-minded opportunism, and absolutely no use to the education of the working class.
    Almost daily, we are told to expect change. We are also told there is no alternative to the status quo, capitalist society, bourgeois society. We are offered statistics to explain change, change only for capital accumulation. Never are we told the source of the change in society.
    For Marx, the driving force of history is the basic contradiction between the social forces of production and the social relations of production. Marx also reveals that the evolution of the forces of production, i.e. history up to and including the present has been based on the exploitation of one social class by another. He shows, also, that at a certain stage of the development of each mode of production, e.g. feudalism, capitalism – the relations of production particular to each epoch become a fetter to the further evolution of the productive forces and a fetter to the further evolution of the social relations of production.
    Certainly, mounting evidence reveals that the working class are increasingly angry at the activities of the ruling capitalist class. Will not be long before this process leads the working class to by-pass the thought of vested interests, and move to Marx.
    Obviously for the bourgeoisie, but including many who call themselves ‘on the left’, as Dylan said /you just want to be on the side that’s winning/. Understanding the dialectical thought of Marx shows that / the times are always changing/.
    Many on the so-called left do not understand what the statistics of the bourgeoisie show the ruling capitalist class: That despite what they do, (including thoughts on regulation) the global organic growth of the rate of profit will not happen. Disintegration of capitalist society will deepen.
    Some on the left are now proposing, e.g, QE for the people,
    know absolutely nothing substantial (scientific) regarding the decline of capital.
    Time that the so-called academic left, came to understanding of Marx, left bourgeois cloisters and joined the working class.
    http://www.capitalismnofuture.co.uk incl: Marx: Capitalism No Future

  5. Tony Walker Says:

    No scheming as a free lunch, the devil now owns your soul.

  6. Tony Walker Says:

    That should read: “No such things as a free lunch….” Bloody predictive text!

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