So, we are in the midst of another global financial shock. Stock markets bungee jumping. Dire warnings from the IMF. Countries collapsing under the weight of their own debts. Unemployment rising as real incomes fall (except of course for the rich who do well whatever happens). What do we call this?
Is this still the Great Recession, that followed the 2008 banking crash? Is it the Great Contraction, as 30 years of accumulated debt finally has to be paid? Or is it, as some forecast as early as 2007, another Great Depression?. Well, none of these terms is very precise. Recession is just two quarters of negative growth, and there is no accepted measure of economic depression. But I can’t think of any better way of describing it.
It is four years since Northern Rock became the first major retail British bank to suffer a run on its deposits since the Second World War. Since then, we have had a secular decline in living standards, a return of inflation, growing unemployment and part time working. There has been a collapse of small businesses, an investment strike and two rounds of quantitative easing – money printing. Britain lost about 6% of output in the 2008-9 crash and while this hasn’t been made up, the economy has been growing, albeit painfully slowly. The massive fiscal stimulus delivered by the G20 in 2008-9 has done its work. But it appears that the same problems are recurring: a failure of banks to lend, investment strike by corporations.
This does look very like 1933. After the Great Crash of 1929, the stock markets recovered quite quickly, and a lot of people made money fast. Everyone thought that it was back to business as usual. It wasn’t and by 1933 all the nasty symptoms were returning. This was when Roosevelt finally grabbed the economy by the scruff of the neck.
I think we have been through a period of denial. After 2008, nothing really changed. In Britain we handed the banks £1 trillion of public money and essentially told them to get on with it. There were no banking reforms. Governments didn’t want to know. They wanted the good times to roll again, and they thought that by stuffing the banks with taxpayer’s money, all would be well again. No one was prosecuted for fraud, even though most of our financial institutions had been involved in misrepresenting the value of assets and selling financial products which they knew to be highly risky.
The Union Bank of Switzerland story tells it all. There is no better parable for the failure of governments to realise the nature of the 2008 banking crisis and the sheer irresponsibility of regulators in failing to do anything about it. Those who refuse to learn from history are condemned to repeat the mistakes of the past.
Crazy name; crazy guy. Kweku Adoboli. the London based trader for the Union Bank of Switzerland, set a new benchmark for financial fraud last week, by losing £1.3bn. He made Nick Leeson, who ran up the £800m losses that brought down Barings Bank in 1995, look like he wasn’t trying hard enough. Really, calling this casino banking is an insult to casinos. No gaming establishment would allow one of its people to run up debts on this scale.
It was a salutary reminder that the bonus culture, which led to the 2008 crash, is still alive, and that young men are still being lured into risky trading by the prospect of getting rich within a few years. UBS has been exposed, yet again, as a rogue bank with little or no control over what its high earning employees are up to. Within hours of this story breaking, Knacker of the Yard was on the case and we had a statement from City of London Police Commander Ian Dyson that Adoboli had been arrested on “suspicion of fraud”.
But hang on a minute – what about the bosses at UBS? Why aren’t they in handcuffs too? This guy was trading at the sharp end of investment banking, on ETFs – Exchange Trading Funds. These have taken over from sub-prime mortgages as the financial derivative of choice for the fast set in the City. But surely there is culpability here higher up the chain of command? Adoboli’s line managers are guilty at least of dereliction of responsibility; at worst complicity in fraud. Why aren’t they being brought to book?
UBS has form. In 2009, the Swiss bank was collared by the US Revenue for concealing the identities of many rich American clients so they could avoid paying tax. It agreed to pay $780m in a “deferred prosecution agreement” . Lovely idea that. I wonder how many of the “feral youths” who robbed shops in Clapham were offered “deferred prosecution agreements”.
UBS was also heavily involved in sub-prime mortgage bonds and was taken to court for selling these dud securities to its clients even when they knew they were worthless. In this they behaved no differently from the other investment banks. Goldman Sachs, the biggest and baddest bank on Wall Street, also knowingly sold dud mortgage bonds to clients. It paid $550 million to settle fraud charges levelled by the US financial watchdog, the Securities and Exchange Commission. But no Goldman executive was ever arrested or charged.
This month, our own Serious Fraud Office, launched its own belated investigation into fraud in asset-backed securities in the City of London. Again, this was prompted by a US authority, the Federal Housing Finance Agency, filing law suits against 17 Banks including RBS, Barclays, and of course USB for selling bonds with “materially false or misleading statements or omissions..including…overstating the ability of the borrowers to repay their mortgage loans”.
Now, to any reasonable person, that means fraud, which makes you wonder why the bosses of these banks aren’t under lock and key pending bail hearings. But when the law and high finance collide, it is invariably the law that backs down. Policemen are frightened of people with lots of money, and it is assumed that they’ll hire lawyers to get them off any charges, so they don’t bother arresting them – unless they are dumb traders with names like Adoboli.
And the government appears to be little more resolute than the Met when it comes to policing the City. The Vickers Report last week called for ring-fencing of the investment and deposit arms of the big banks so that every time a casino trader goes under, the ordinary depositors don’t lose their shirts. This is the very minimum that Sir John Vickers could have demanded to rein in our “feral” bankers. But he has given the banks 8 years to conform, which is an eternity in the world of high finance. Many of them will probably not exist by 2019 or will have allowed themselves to be bought up by foreign banks which aren’t subject to the rules.
City lobbyists persuaded the government that to clean up the City any sooner would “harm growth”, “increase banking costs”, “damage London as a leading financial centre”. The banks allegedly claimed that there would be a flight of bankers out of the City. You might say “good riddance”. You might also say that the idea of RBS upping and leaving to the Caymans is as daft a threat as was ever made by a special interest group. But this government, like the one before it, is afraid of the power of the banks, and their ability to wreak havoc in the wider economy.
And that is the back-story to the chaos currently afflicting the eurozone. The increasingly desperate attempts being made by European leaders to prevent Greece leaving the single currency is not out of concern for the Greeks. No one cares about them. It is the fear that a Greek default will lead to lots of banks in France and Britain going bust because they lent huge sums to the Greek government without any guarantee that they would be paid back. This is why our eurosceptic Chancellor, George Osborne, seems so keen suddenly on promoting European political and financial integration. He wants Germany to back the Greek bonds so that he doesn’t have to bail out our dud banks a second time in three years.
Once again it is all about saving the banks from their own irresponsible lending. Turning a blind eye to financial fraud. Using taxpayer’s money to salvage banks from the folly of their own greed and dishonesty. Isn’t it time someone called a halt to this? Instead of flooding the markets with free dollars, as happened last week, world leaders should be setting up a genuine international central banking authority with the power to bring order to the financial world. It should issue a new international reserve currency and finance its activities by a tax on international financial transfers – the “Tobin” tax that Angela Merkell and Nicolas Sarkozy recently called for in a moment of fleeting sanity. This is what John Maynard Keynes called for after the Second World War, and as in so many things, the great economist was right. Bankers are fools who need to be saved from themselves.