After Vickers: The Winter of Hope and Creation

September 14, 2011

Jayati Ghosh has a characteristically well argued piece in the Guardian today, (although it concludes, perhaps rashly, that “the system’s famed capacity for surviving and re-inventing itself seems, for the moment, to have disappeared.”) The rush to austerity, the unwillingness to tax the wealthy enough, the lack of will to fund large-scale infrastructure and redistributive projects is damning the global capitalist system to depressed demand and disfunction, with no remedies in sight.

This is a recapitulation of much of left-wing criticism during the “great recession”. Three years after the collapse of Lehman Brothers, however, not much of this good sense has percolated into the minds of policy-makers or high profile journalists and editors. The conventional wisdom remains relatively firm, and the government position is not close to budging on its central demand for rapid deficit reduction and wholesale social engineering to wipe out the debatable “structural deficit.”

The Vickers Report into the structure of the UK’s financial sector is symptomatic of this conservatism. As Ghosh notes, “The Vickers report on controlling the financial sector is well-intentioned but so modest as to tend to irrelevance. It misses essential points about the financial system, and the lengthy grace period it awards to banks (more than seven years before they have to ringfence their operations) risks being completely overtaken by the likely future volatility in banking.”

This is precisely what the Vickers commission was intended to achieve, however – to give the impression of doing something to renovate the unpopular (and dangerously volatile) financial system, while protecting the class position and wealth of shareholders and executives within it. Real alternatives to corporate finance were absolutely shunned. Ghosh argues that “the aim should be more diverse financial systems, with a bigger role for public and co-operative institutions” and I totally concur, but we are far from even being able to mention these ideas in public without being met by blank incomprehension or derision.

Vickers had no intention of straying onto anything so constructive. His whitewash of a report was explicit in its narrowness of vision. Despite recommending that retail and investment sides of financial institutions be separated, his commission refrained from beefing up independent regulation and public oversight of how financial institutions are run. On at least two occasions in the report’s text, the writers counseled that “corporate culture cannot directly be regulated” before offering baseless reassurances that UK banking could be “consolidated” for the “long-term” or that a “separate, consumer-focused culture in UK retail banking” can be constructed.

Any “consumer-focused culture” would presumably magically become distinct from the profit-obsessed culture obtaining in actually existing banks. We have no reason at all to believe this statement, which is essentially religious, placing faith in the probity of people and institutions that have worked assiduously for years to erode any trust in their capacity for ethical trading.

Vickers urges that any reforms of the financial sector should be left to the financial sector to enforce and carry through. Profit-maximizing corporate banks are to be trusted to “ring-fence” retail and investment banking, despite a litany of criminal activities in which they have been engaged. This stretches far beyond the use of ordinary customers’ funds as collateral for gambling on the over-the-counter derivatives exchanges, which played such a key role in bringing the financial system to its knees.

For years, the high street banks had been swindling customers through payment-protection insurance (PPI). PPI was supposed to provide a safety net to ensure that customers could repay mortgages and other debts should they become unemployed or ill. But, as the Vickers Report itself notes, “the market for payment protection insurance (PPI) services has…been found to be a source of excess profits, as well as a common area of mis-selling” as “banks found that they could earn large fees by selling PPI alongside a loan or mortgage, and in many cases through misleading sales techniques.”

Banks hardly ever told potential PPI holders that their policy could be voided if they suffered from a pre-existing medical condition, while many were told that PPI was compulsory, not an optional extra. Banks with-held information about monthly payments to fund PPI policies and the terms of the loan, meaning that thousands of customers took out policies that they clearly could not afford. When these practices came to light, hundreds of thousands of complaints were registered, with a success rate of around 75 percent, leading to multi-billion pound compensation payments by the banks (which had already spent millions trying to rule such compensation payments legally unnecessary).

Such criminality is endemic in profit-centred banking, whether it be in investment divisions (packaging sub-prime rubbish as shiny, desirable credit products) or retail divisions (face to face bilking of ordinary customers). And yet, the Vickers report maintains that “corporate culture cannot directly be regulated”. The co-operatives and publicly owned institutions suggested by Jayati Ghosh cannot be countenanced as a real alternative to the criminal cartel that we currently rely on for credit. In fact, we will have to trust the same feral overclass to regulate credit providers in the future.

There is almost no evidence of political action to create an alternative. The best that Labour can come up with is a derisory call for bad bankers to be “struck off”. Speaking to the TUC, Ed Miliband thundered that “the way our banks work needs to change” and “Not just separating the retail and investment divisions” was needed, which sounded promising. But the alternative offered by Miliband? Only, “greater competition too.”

Competition was one of the mechanisms by which payment protection insurance became such a popular scam – as retail banks scrambled to pour their serpentine lies into the ears of ordinary loan applicants and home owners. The intense competition to inflate share prices among corporate banks was a key driver of risky lending and speculation in the run up to the financial crisis. Competition is not the answer, which may partly have contributed to the reception Miliband met in front of the trade unionists.

What I think is happening here is very simple. Labour and the Conservatives are dependent upon the money earned by the financial sector for their very existence. They also subscribe wholeheartedly to the neoliberal mantras regarding open markets, labour market flexibility and minimal government intervention. More importantly, the political system is constituted largely by dull-minded, image obsessed drones who have no interest in mobilizing public support for radical change and, in fact, despise the public. All of this means that any movement towards an alternative financial system must come from social movements and protest. Miliband’s audience at the TUC knows this. I suspect that Jayati Ghosh was getting at it too. This is the time to bypass the sclerotic heart of politics, for a winter, not of discontent, but of hope and creation.

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One Response to “After Vickers: The Winter of Hope and Creation”

  1. Watsonlow Says:

    Governments only have to prop up banks that take retail deposits. Bailing the banks out is cheaper than refunding the depositors. Government should remove the guarantee on retail deposits which currently stands at €100,000 in the EU. We would all then move our cash very quickly to banks which do not undertake casino banking, which have a record of transparent accounting and which have demonstrably rational credit management processes and if we decide that none of the current crop match up and put what scratch we have into Premium Bonds and National Savings I would call that a result.


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