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Ben Chu: Why the banks are an undemocratic vested interest

Posted by Eagle Eye
  • Thursday, 11 March 2010 at 02:41 pm

John Rentoul has posted a typically intelligent reply below to those (including me) who found his attack on Nick Clegg's argument on the vested interests of the banking sector unreasonable.


And he's of course right to argue that the analogy between the power of the unions in the 1980s and the banks today is not exact. But the manner in which the unions exercised political power thirty years ago and the manner in which the banks do so today is a valid analogy. The unions successfully resisted labour market and public sector pay reforms that were needed for the wider good of the country through the threat of strikes and their considerable leverage as a paymaster for the Labour Party until Thatcher, finally, faced then down and broke their power. 


The banks are resisting reforms to break up large, systemically unsafe, institutions today through their considerable lobbying power and their funding for political parties on both sides of the Atlantic. This resistance is inimical to the wider public good. (Read this seminal article by the former IMF economist Simon Johnson to understand the nature and scope of their political power).


In the case of the banks, the political influence is not purely financial. As I have argued in the past, it is as much due to the ideological capture of a generation of politicians who can't accept that the private sector ever gets things wrong. But this raw financial influence does exist. And it is this behind the scenes pressure on elected politicians which, I believe, merits the label "undemocratic" for both the banks and the old unions.


A couple of other points. John says "it is not even as if City regulation were framed under pressure from the banks in order to suit the interests of their shareholders, which was true of the trade union law before the 1980s". Actually, the repeal of Glass Steagall in the US in 1999 was driven by intensive lobbying from the former boss of Citigroup, Sandy Weill, who wanted to build the world's biggest financial services group.


John also says the banks "are powerful in that they represent the laws of supply and demand". No; the banks are powerful because they are "too big to fail". Governments dare not let the market discipline them when they lose serious money because the wider social consequences of them collapsing - the breakdown of the payments system - would be utterly disastrous. The solution is to break them up so they are small enough to be allowed to fail safely - but it is this very reform that the banks are furiously resisting. Smaller banks are less profitable. And investment bankers like being able to speculate with the funds of ordinary depositors.


Actually I do think John has grounds for criticising Clegg. But its not because of the Lib Dem leader's righteous anger towards the banks. Clegg's wrong to knock "the Cameron-Osborne act" on this because the Tories have actually been very sound on the need to break up the banks. Whatever else they might have got wrong on the economy, Osborne and Cameron have recognised that the financial services have become a powerful, undemocratic, vested interest that needs to be faced down for the good of the country.


Comments

The sooner these casinos are broken up, the better
2barrows wrote:
Thursday, 11 March 2010 at 07:56 pm (UTC)
It gets worse. Peston picked up an alarming prospect from the recent FSA Financial Risk Outlook.

Basically, the banks need to replace £440 billion of loans & finance by 2012 to replace maturing debt. That could come from an increase in savings deposits (but rates are unattractive, government rates trump them, and the 12% p.a. savings growth required is very unlikely); from increased issuance of mortgage-backed securities on a scale equivalent to the boom years of 2004 to 2006 (er, been there, done that, not again I think...); or from Muggins the Taxpayer, who has already doled-out £300 billion of that £440 billion in loans and banking support.

So those banking support loans will likely get rolled-over. At which point they become more enshrined as formal debt as a % of GDP, which is then sovereign debt, which we as a country are rated on. Another £300 billion would hike the national debt by a further 20%.

Peston's excellent article is here http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/03/why_a_new_government_may_exten.html

Shame that no-one else has picked this up...but we are drowning in short-termism at the moment. The sooner this poxy election is over, the better.
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