Adair Turner has stimulated a debate on the social usefulness of banks and bankers. This is necessary, timely, and indeed urgent.
The robber-bankers have caused as-yet unmeasured damage to Western society and beyond, and have called in aid the world’s treasure to rescue them from themselves. Now, a mere three months into a period of mild optimism (which is no more than to say the stricken patient has enjoyed a quiet night) and facing modest regulatory changes, they would have us accept that it’s to be business as usual from now on. Not good enough.
Around these parts we do not hesitate to enter the substantial positives in the ledger. Banks and other financial institutions provide many services that are unequivocal social Goods: basic banking services and deposit-taking; liquidity, pricing and market-making for the trade of assets; instruments and markets for insuring and hedging unwanted exposures; and of course credit and clearing. Although rarely remarked upon, the social benefit of the extraordinary global credit-card system (for example) is of great significance for retailers and personal freedoms alike.
Delivering these valuable services effectively and (fairly) efficiently en masse has necessarily entailed the development of an ultra-powerful financial infrastructure. Though we do not follow the excellent Alice of Bubble in her rather flippant damning of the whole edifice of derivatives, it is clear that the abuse of this mighty system for personal gain has been ridiculously easy, prevalent, and largely unpunished.
By abuse we do not mean speculation, which plays a vital role in human affairs, not least in its stimulation of liquidity, innovation and the Darwinian process in business.
Rather, we mean the activities of the one-way bet merchants – the knowledgeable and well-placed players who take risks without paying the appropriate dues for the use of the risk-capital that underpins their gambling, but who stand to profit hugely. Almost all the sub-prime scams, ponzi schemes and derivative pyramids can ultimately be expressed in these terms. This is effectively theft at the expense of ordinary punters, shareholders, pensioners, ultimately whole bodies of tax-payers who are drafted to bail out the failures
All this strongly resembles the behaviour of the 18th century European merchant-expansionists who advanced their ultra-aggressive businesses and private armies across the globe, pocketing the profits when the going was good, but calling on the mother-country for ships, troops and treasure when they became over-extended. A great deal for them, but an expensive proposition for their countrymen.
In Dark Continent, his fine survey of Europe in the 20th century, historian Mark Mazower wrote:
“The real victor in 1989 was not democracy but capitalism, and Europe as a whole now faces the task of establishing a workable relationship between the two.”
No small challenge, and the status quo is unsatisfactory. 2009 is the right time to attack this task with renewed purpose, starting with democracy demanding that – as with any properly-managed capital adequacy scheme - the banks pay for as much of society’s fall-back capital that they tacitly rely upon to underpin their risk-taking. Here at C@W, we continually oppose subsidies and free rides for windfarms and nuclear power plants and the like: the same principles apply to banks and their schemes.
And where they are risking their own and their shareholders’ capital, let their speculating be acknowledged explicitly, and sealed off hermetically, from their non-speculative businesses and the common weal alike. As bankers are useful and/or self-sufficient, we should encourage them; and as they abuse society's capital, we should cut them off at the knees.