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2010, banks, capitalism, credit crunch, financial crisis

Let’s have some capitalism for capitalists.

My Big Idea for 2010? Simple. Bring back capitalism. No, I’m serious. I may be a superannuated socialist who thinks the banks should be nationalised and has always supported the redistribution of wealth. But right now, we need a bit of capitalist rigour to sort out the mess left by the financial crisis. It’s time for financiers to start paying for their mistakes, honouring their debts without rushing to the state for another bail out. Just like Margaret Thatcher said of the old nationalised industries thirty years ago: no more lame ducks; no more feather-bedding.

Capitalism is supposed to be about competition – failing firms are supposed to go out of business so that capital can be re-assigned to profitable businesses that are producing things that society wants and needs. Capitalism cannot function when one set of capitalists is given privileged access to public funds in order to insulate them from market forces – and provide them with lavish profits they haven’t earned. Yet that is exactly what has happened over the last eighteen months – and on a colossal scale. Hundreds of billions of pounds have been thrown at loss making enterprises which just happen to be called banks. As the governor of the Bank of England, Mervyn King, famously put it, in what must be the quote of the year: “Never has so much been owed by so few to so many, and with little real reform”.

The investment banks who brought us the 2008 crash learned that if their debts are big enough, and their losses large enough, then they become “systemically important” and can expect to be rescued by the state to prevent a collapse of the entire financial system. The banks actually have a lot in common with the old state enterprises in Communist states of Eastern Europe in that they have no competition and no risk of failure because of their access to public funds. But we surely learned from the Soviet experience just how dangerous it is to allow a small clique to seize control of the economy, whether bankers or communist party bureaucrats.

The West’s financial oligarchs have plunged the world into recession, destroyed millions of jobs and consumed vast amounts of social capital, but like the old Communist bosses in Russia, it didn’t cost them personally. They have been insulated from risk by the state. Their share options may have fallen somewhat in value, but thanks to the billions handed to them by the government, and reduced competition, banks like Goldman Sachs are richer than ever and paying the biggest bonuses in history. Even state owned Royal Bank of Scotland, officially the worst bank in the world, has been handing million pound bonuses to the very executives who made RBS a by-word for irresponsible speculation. They say, without irony, that they must reward excellence or lose their best people.

What sticks in the craw is that many of these people – the Fred Goodwins, Andy Hornbys, Eric Daniels – used to be the cheerleaders for Thatcherite private enterprise. Financiers were the first to condemn trades unions in the 1970s for their restrictive practices, their leap-frogging pay claims and their lack of social responsibility. Yet here they are, snouts in the trough, arguing for parity with other plutocrats, demanding special deals, ignoring the impact of their selfishness on the rest of society. These very banking executives used to claim that the free market had to be protected from the dead hand of state control. Now here they are running to the state for bail outs, equity injections, interest free loans, asset protections schemes – anything to protect them from the very system they imposed on the rest of society. It’s one law for them, another for the rest – the mission statement of the economic parasite since the days of Feudal privilege.

Really, there is no more pressing issue facing our legislators as the British economy hauls itself wheezing out of recession in 2010. Whoever wins the next election must deliver a very clear warning to the City of London: never again! There is no free lunch any more. Banks that are bankrupt must go out of business. Directors must lose their jobs and bonuses. Bank shareholders must lose all their equity, as in any other risk venture.. Same with other loss-making organisations that have been seeking government support like gas guzzling car manufacturers, property speculators exploiting near zero interest rates, quasi-nationalised train companies and fly-by-night PFI providers.

If we don’t draw a line under this now, the behemoth banks, knowing they are too big to fail, will simply return to irresponsible lending and derivative trading exactly as before. Actually, they’re already at it. Have you wondered why the banks that were at death’s door a year ago are now making vast profits again? Why their share prices are rising so fast? Well, first of all, the government – that’s you and me – has taken hundreds of billions of bad debts off their books in asset protection schemes so they don’t have to register these as losses.

But that’s only the start. The banks are currently borrowing money at 0.5% interest rates from the Bank of England and then buying government bonds that pay around 3.5%. That is as near to free money as it is possible to get – except that the money ultimately comes from us in our taxes. Banks are also using this cheap money to speculate on shares, hence the recent stock market boom, and in commodities like oil and gold, which have been making splendid returns recently. What they are not doing is lending to productive industry- which is still at record low levels – or to first time home buyers.

Banks don’t make things, apart from debt, so it’s often hard to understand quite how they make their profits. They use impenetrable jargon like “bid-offer spreads”, “discount window”, “carry trade” “derivative trading” which mystifies the whole process. But at root it isn’t that difficult to understand. Say I lend you £100 at 1% interest for one year , and you then lend that £100 pounds to someone else at 10%. After twelve months, you get back £110, but you only have to pay me back £101. That’s almost exactly what the banks are doing. It is like magic. And that’s what financiers really are – conjurers who fool us into thinking that they can create money out of nothing.

Trouble is, they also fool themselves. And this is how the great credit bubble began in the early years of this decade, when interest rates were kept too low for too long after the 2000/01 dot.com crash. Banks were able to make huge profits, lending out cheap money at ever greater multiples of their core capital. They didn’t care who they were lending it to because, they believed – rightly – that the government would come to their rescue the in the end. Only one thing will prevent the bankers blowing up another credit bubble: the fear that they may lose everything if they go too far.

One final thought: the rest of us could do with taking a look at our own financial behaviour too. The banking crisis may have been caused by the greed and irresponsibility of a financial kleptocracy. But we have all participated in the creation of the credit economy – most obviously through the housing bubble. People have grown used to their homes ‘earning’ more that they do by working at a job. We have become addicted to living on debt: equity release, credit cards, mega mortgages, overdrafts, student loans, car leasing arrangements. Instead of trying to live within our means, we have sucked hard and long on the teat of credit.

This has served the long term interests of the banking oligarchs, but we cannot ignore our role as the bankers willing little helpers. Clambering greedily up the “housing ladder”, exploiting tax breaks on property ownership, demanding such high prices for our real estate that first time buyers have been priced out of the housing market altogether. And if the mortgage becomes too much we expect the government to cut interest rates to magically wipe away our debts, just like the banks’. Millions of home owners with large mortgages have had tax free windfalls of several hundred pound a a month in 2009 thanks to near zero interest rates. People with huge debts are being given a free ride. Older people are being bribed to stay in big homes they don’t need while young families can’t get anywhere to live. Britain has become two nations: the home owners with their subsidised loans and the rest who can’t hope to afford to join them. And ultimately it’s all paid for by money printed by the Bank of England – a sure fire recipe for hyper-inflation.

When I was a naive young man, I campaigned for a socialist economy in which the commanding heights of capitalism were brought into public ownership and control. Well, in a way it has happened. The state now owns large chunks of the banking system, and has supported the rest of it through a whole range of bail out measures, from buying toxic loans to acting as lender of last resort to banks bereft of liquidity. But this isn’t promoting the common good. We have created a bastard synthesis of finance capitalism and communism – a system of socialism for the banks. Time for a little bit of Thatcherite medicine to be applied to people who were so keen to apply it to the rest of society. Let’s have some capitalism for capitalists.

About @iainmacwhirter

I'm a columnist for the Herald. Author of "Road to Referendum" and "Disunited Kingdom". Was a BBC TV and radio presenter for 25 years - "Westminster Live" and "Holyrood Live" mainly. Spent time as columnist for The Observer, Guardian, New Statesman. Former Rector of Edinburgh University. Live in Edinburgh and spend a lot of time in the French Pyrenees. Will that do?


4 thoughts on “Let’s have some capitalism for capitalists.

  1. I agree. This would get things moving again. But our Governments still have a major role in this. Creating the right conditions for enterprise and competition to flourish is really important. Whether that be shortcuts to planning laws, incentivising investment in the renewable industry, making banks smaller, encouraging automative companies to invest in the UK in hydrogen and electric-powered vehicles, and actively discouraging over-reliant wealth creation in speculative industries through stocks, shares, housing and financial services.

    Posted by Andrew BOD | January 7, 2010, 10:15 am
  2. "When I was a naive young man"Iain you are now a 'naive' Old mancapitalists paying for their mistakes never heard of such a thing. That is why we have Democracy which means the people must pay.

    Posted by Mr. Mxyzptlk | January 7, 2010, 12:09 pm
  3. Great informative. Thank you!“ADV.” Think REALTOR ® Think Ben! Houston, TX. http://www.har.com/benhuynh281 561 5386 Champions Real Estate Group. “Open Doors, Closing Deals” Referral is appreciated

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  4. Keep posting stuff like this i really like it

    Posted by Anonymous | January 20, 2010, 4:47 am

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