First published in the Telegraph on 4 June 2009
At first glance, the expenses scandal is a crisis with plenty of losers and no winners. It undermines politicians, the country’s constitutional framework and the foundations that have historically made Britain a great place for people to invest. But one constituency has been rubbing its hands with glee throughout the past month: the bankers and financiers of the City and beyond. It looks increasingly like recent events will provide a smokescreen that lets them get away with financial gains of far greater scale.
An economic collapse invariably generates public opprobrium against those considered responsible. In the 1930s it was the Wall Street bankers who were fingered for blame. In the 1970s and 1980s it was those on the picket lines. Until last month it looked all too likely that this recession would follow the same pattern: that, as unemployment climbed to record levels, public recrimination would be directed towards the bankers and investors at the centre of the financial crisis, some of whom rewarded themselves with bonuses that bore no relation to their actual performance.
They have taken some punishment. Many have lost their jobs; anyone who has invested money in bank shares in the past decade will have lost the lion’s share of their cash.
But is the punishment commensurate with the crime? The whole point of market economies is that those who err are taught a lesson that ensures they never reoffend. In this case, that lesson would have been the wholesale collapse of the banking system. Clearly, that would also have resulted in such inordinate collateral damage to the wider economy that it would have made the 1930s look like a walk in the park: so governments have done all they can to avoid such an eventuality.
Throughout the crisis I supported such measures – as well as the extraordinary gamble of quantitative easing and near-zero interest rates – but only on the strict proviso that, when the initial trauma was over, policymakers should take measures both to punish those responsible and restructure the financial and economic system in order to avoid a repeat.
As Rahm Emanuel, Barack Obama’s chief of staff, has said, you don’t want to waste a crisis. I fear we may be about to waste this one. Already the UK is showing signs of recovery. Yesterday we heard that the services sector, which dominates the economy, is starting to expand again. In other words, the recession may have ended last month. Credit is still tight, but the unprecedented dose of monetary and fiscal medicine doled out by the authorities is starting to take effect. This comes at a deadly cost. The amount of debt incurred by governments is enough to pay for a world war. The potential wall of inflation which could be generated by quantitative easing (if it succeeds in beating deflation) could be immense. As things stand, these costs will be borne by the taxpayers, who are mostly innocent. By any measure of justice, this is simply wrong.
And yet there is a palpable sense throughout the City that, now the worst is over for the financiers, it is back to the casino. Banks are starting to raise more capital. Those that have survived the crisis have seen their shares catapulted higher; and no wonder – so much of the competition has either withered away, collapsed or been nationalised that the banking world has suddenly become a remarkably profitable place. In the US, some banks are even planning to repay the bail-out cash they received from the government.
However, this is not a sign that we are successfully through the storm. Life has changed irrevocably over the past year or so. In that period, governments have made it crystal clear that they will do whatever it takes to ensure no major bank fails. Even when the actual monetary crutch is kicked away, this implicit guarantee remains in place. In other words, the system is still reliant upon the idea that taxpayers will bear the brunt if a bank fails. The gains, on the other hand, flow straight into the hands of the bankers.
Even if the Government has failed to grasp the enormity of this, some in the Bank of England have not. Its deputy governor, Paul Tucker, recently raised the prospect of banks having to be effectively taxed for the costs of the bail-out. Martin Wolf of the Financial Times points out that, at some point, added costs or restraints must be imposed on a sector which, like CO2-emitting industries, pollutes the rest of the economy.
To do so will involve some degree of bravery and a large dose of public support. The big banks and their investors have a unique relationship with politicians – when industrial companies collapse, their fate is decided by regulators and lawyers, but when the financial system falters, the Government calls in investment banks as advisers.
Finance is both complex and essential for the world economy, but it is not a sacred cow. It does not have a monopoly on intelligence (who could claim otherwise, given the scale of its recent failures?). To suggest that we can get away without a root-and-branch reform of the system is simply wrong. We will need a far-reaching combination of smarter regulation and smarter banking laws. I hope that in the wake of the expenses scandal, and in the dying light of this Government, we don’t forget this lesson