When historians look back on last year's catastrophic banking crisis, they will regard the testimony of Alan Greenspan before the US Congress as one of the defining moments. "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity (myself especially)", said the former chairman of the Federal Reserve "are in a state of shocked disbelief".
With these words of dismay from the prophet of financial sector deregulation, the intellectual justification for the light-touch approach of a generation of politicians crumbled. But the curious thing is that though the brain of free-market fundamentalism died that day, like some B-movie zombie, the body continued to move. And on both sides of the Atlantic, the idea that the banks must be left to their own devices still drives official policy.
Around £1 trillion of public support has so far been committed to the UK banking sector (the £62bn Bank of England loans to the Royal Bank of Scotland and HBOS that have come to light this week were a drop in the ocean). But all this taxpayer largesse for the financial sector has been accompanied, as the Governor of the Bank of England, Mervyn King, recently noted, by "little real reform".
It is true that ministers have made a lot of noise about putting finance on a shorter leash, but their actions tell a very different story. Since last year's emergency recapitalisation every Government policy, from the toxic asset insurance scheme to allowing Lloyds to mount a new rights issue, have been designed with one goal in mind: to get the banks back into the private sector, and out of ministers' hands, as soon as possible. Rescued banks have had an equally easy time of it in the US. And there is a stubborn refusal by policymakers in both London and Washington to break up large banking empires, despite the evidence that these "too-big-to-fail" behemoths are unsafe.
So why are governments pursuing such hands-off policies, despite the trauma we have been though? The raw lobbying power of the banks is part of the answer. In 2007 the US financial sector employed five lobbyists for each member of Congress. But that cannot be the sole explanation. There is, after all, now a good deal of countervailing pressure from angry electorates. There are few votes in being indulgent to bankers.
To answer the question we need to look not to money, but ideology. Simon Johnson, a former economist at the International Monetary Fund, explains it thus: "The power of the financial sector... is based not on a few personal connections, but on an ideology according to which the interests of Big Finance and the interests of the American people are naturally aligned – an ideology that assumes the private sector is always best, simply because it is the private sector, and hence the government should never tell the private sector what to do, but should only ask nicely, and maybe provide some financial handouts to keep the private sector alive". Johnson was talking about US policy, but his diagnosis applies equally to Britain.
This ideology was dangerous in the boom years. And it is likely to prove equally dangerous if it is alllowed to continue driving policy in the aftermath of the bust. Despite all the billions that have been poured into the banks, they remain under-capitalised and sitting on huge piles of toxic debt. In their feeble state, these institutions are not going to lend to businesses on the scale needed to support a healthy economic recovery.
Then there's the threat of another banking meltdown. Many of the free-market fundamentalists who cautioned against regulation in the boom have taken, more recently, to issuing warnings about sovereign deficits. They point out that Britain's national debt will be approaching 100 per cent of GDP. But here's another scary statistic: the liabilities of British banks are equal to roughly 500 per cent of our GDP. There must be doubt over whether the state could afford another bailout.
Yet banks with an implicit state guarantee are loading up, once again, on risk. Barclays Capital, the investment banking arm of Barclays, seems determined to become the world's biggest hedge fund. Even The Royal Bank of Scotland is growing its investment banking division. The surviving titans of Wall Street are once again placing big bets. The quick profits are in speculation, rather than conventional loans. But so is the risk.
The zombie is still lurching forward. This horror show is far from over.Reuse content