Desperately crying all the way to the banks

At the start of 2011, when Tunisians rose up against their failed government, they stayed in the streets until all its key members had left. Prime Minister Mohamed Ghannouchi’s plea to retain some ministers, because they alone knew how to run the system, won little sympathy. An angry public saw no reason why any incompetents from the old regime should survive into the new.

But when Britons express similar outrage against their failed bankers, Ghannouchi’s logic still applies in force. While a few boardroom heads rolled into the safety of six-figure pensions after the crisis of 2008, most who steered the financial system to the brink of collapse are still in generously rewarded posts.

The chairman of the Independent Commission on Banking (ICB), Sir John Vickers, struck a tougher note on 22 January. He hinted strongly that the ICB’s final report, due in September, will shake up the City, with a legal separation of commercial (high-street) banks from the City-based investment banks, and capital requirements higher than the already-raised international norm.

Economists such as Sir John have redefined the subject around incentives, and believe those given to bankers after financial-sector deregulation played a large part in the crisis that followed. There were tax advantages in borrowing, so banks doubled their debt while running down the equity capital that buffered against insolvency. Deposit insurance promised to refund high-street bank depositors even if the money-managers lost it; so linked investment bankers gambled with that money until it was lost.

Pay was supplemented by bonuses when bets paid off, but not docked when they misfired. So risk-taking was diverted from a stagnant real economy into a growing financial sector.

But the financiers proved fallible in a way that now makes them unassailable. If banks are still financially struggling when the ICB gives its final report, politicians won’t want to stress them further with tighter curbs and forced divisions. And if banks are by then recovering under existing rules, there will be no political will to change these.

The bankers’ first source of power is that no one makes money unless they do. The banking system had to be rescued in 2008, at unprecedented public expense, because its collapse would have stalled the flow of payments and made asset prices spiral downwards, triggering depression. Governments across Europe are now trimming the social safety-net because of the deficits they ran up in hurriedly installing a financial safety-net.

Their second source of power is that no one makes much money doing banking the old way. Competition among high-street banks, heightened since big building societies demutualised, narrowed the traditional spread of lending over deposit rates. The retail banks responded by linking up with wholesale banks. Bigger ones, such as Barclays and RBS, expanded directly into investment banking, relying on trading bonds, shares and derivatives for a growing share of revenue and profit. Smaller ones, like Northern Rock, linked to wholesale markets indirectly, using them to raise cheaper funds than they could get from customer deposits.

Bankers would like to be viewed as technocrats – analytical experts who have moved beyond their specialism (and the call of duty) to put their managerial skills into public service. Technocrats devise solutions to problems, helping politicians choose among options – and cutting through useless debate when one option is known to be best. They innovate to make technical and social systems work better, and apply new ideas for wider public gain.

But technocrats are judged by results, and replaced when these don’t materialise. Bankers have delivered spectacularly bad results, and retain command. ‘Financial engineering’ profited its practitioners but did not produce clear benefits for others. They just picked up the bill when over-stretched machinery blew up.

Bankers now more closely resemble oligarchs – individuals who, through political as much as technical skill, take control of an important social channel and start imposing tolls. Their command over financial flows now seems no more benign than that of media and internet barons over information flows, and oil giants over energy flows. Except that big businesses can still be forced to trim their monopolies and clean up their spillages. Banks’ control of the economic nerve centres lets them pocket healthy premiums when the system works normally; and call in state-financed neurosurgeons when it breaks down.

In the 19th and 20th Centuries, technocrats sided with democrats against the threat of oligarchy. Their role models were the physicists and codebreakers whose ingenuity won wars against fas-cism, electronic engineers who built the internet, and biochemists who decoded the genome. The new century brings worrying signs of technocracy fusing with oligarchy, at democracy’s expense. Unaccountable elites made irreplaceable by publicly harnessed talent, and by strategically placed private profit, have converged in appearance and found common cause. It’s a disastrous re-concentration of talent and power that elected leaders can’t challenge.

The ICB’s brief is to promote stability and competition in the sector. That’s tricky when past competition may have contributed to instability by encouraging higher risks, and the number of players may need to be kept small to referee them effectively. Investment banks may have dragged the sector down in 2007-8, but with less intractable exposure to housing bubbles they contributed to its recovery in 2009. Failure to continue that recovery is now shackling the rest of the economy. The UK fell back towards recession in the fourth quarter not because it snowed, but because bank lending remained frozen.

Commercial banks, like many of their borrowers, are paying off debt. Until their core assets are worth more, they cannot lend more. There is increasing danger of a “doom loop”, in which failure to lend causes houses and other assets to fall further in price, eroding banks’ net worth so they have even less to lend. Manufacturers are growing only because they’ve long been accustomed to investing with retained funds, knowing that banks can’t be relied on for affordable credit. But for bankers, whose influence has long been disproportionate to their numbers, it’s a return to familiar high ground without the need to hide pinstripe beneath a wizard’s cloak.

Alan Shipman is a lecturer in economics at The Open University. He is responsible for the OU courses ‘You and your money: personal finance in context’ and ‘Personal investment in an uncertain world’.

Have you tried new the Independent Digital Edition apps?
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs Student

Guru Careers: Graduate Marketing Executive / Marketing Assistant

£18 - 23k (DOE): Guru Careers: A Graduate Marketing Executive / Assistant is n...

Recruitment Genius: Graduate Trainee

£20000 - £25000 per annum: Recruitment Genius: This leading provider to the fa...

Ashdown Group: Graduate IT Analyst - Global ERP Implementation - London

£25000 per annum: Ashdown Group: A successful & reputable global business is l...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

Day In a Page

How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map
Lionel, Patti, Burt and The Who rock Glasto

Lionel, Patti, Burt and The Who rock Glasto

This was the year of 24-carat Golden Oldies
Paris Fashion Week

Paris Fashion Week

Thom Browne's scarecrows offer a rare beacon in commercial offerings
A year of the caliphate:

Isis, a year of the caliphate

Who can defeat the so-called 'Islamic State' – and how?
Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

Marks and Spencer

Can a new team of designers put the spark back into the high-street brand?
'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

'We haven't invaded France'

Italy's Prime Minister 'reclaims' Europe's highest peak
Isis in Kobani: Why we ignore the worst of the massacres

Why do we ignore the worst of the massacres?

The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

Remembering 7/7 ten years on

Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

They’re here to help

We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
Time to lay these myths about the Deep South to rest

Time to lay these myths about the Deep South to rest

'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

What exactly does 'one' mean?

Court of Appeal passes judgement on thorny mathematical issue