The finance industry can make us much better off. Insurance, payment systems, mortgages, lending to businesses, funding entrepreneurs, futures markets, risk management, the list goes on with the many ways in which finance makes our lives better. But, and it is a big but, finance also carries with it large risks and the risks our current system of finance pose are greater than the benefits. Reform is vital. This calculus will be at the heart of the Banking Commission‘s report published in April and has been the driving force behind the posts I have written over the last few days.
Finance has benefits, but also produces damaging byproducts. Pollutants can be taxed, to embed the cost of the pollutant in the price of the product, for example a banking levy. On the other hand, pollutants can be banned, like we have with certain uses of DDT. The losses from the financial crisis dwarf anything which a banking levy could raise and this leads me to argue that finance must be reformed. The graph from my first post illustrates the losses suffered by the UK as a whole. The red line is trend economic growth from the start of the past decade, the blue line is actual economic growth. I think it speaks for itself. Worse still, evidence cited by Andrew Haldane (pdf) suggests anywhere from around £1.8 and £7.4 trillion of wealth may have been permanently forgone as a result of the financial crisis.
Reform of the banking sector should not be an issue which splits the left and the right. Massive government intervention in finance is now a certainty – no large bank will be allowed to fail – all that is left to discuss is whether we want intervention on the banks terms or on our terms. The US have plans to somewhat restrict the trading activities of deposit taking banks to insulate them from systemic crises. These reforms will not go far enough and will be too easily gamed by the financial sector – it is sadly, where many of the best minds end up. Only a more comprehensive reform, in which the big banks are broken up and the activities of commercial and investment banking split up, will be enough to stop the recurrent financial crises which are the pollutant produced by finance.
Despite the massive long run societal wide benefits from a better financial system, reform will not come easily. People like Jamie Dimon of JPMorgan Chase are arguing that any regulation would make the financial industry less efficient, and the Treasury are already offering pre-emptive compromises to placate the financial sector. These sorts of events will continue to build and financial reform will slowly be moved from the back burner to washing-up bowl of abandoned policy initiatives without popular protest. The banking industry will viciously resist attempts to make it better behaved.
Spending cuts will hit, are hitting, some people incredibly hard, but unless the horizon of action for anti-cuts groups shifts to include financial reform their actions could come to ought in the long run. UK Uncut and other organisations need to take up the baton of boring boring boring financial reform or it will fail. Well-meaning technocrats will always lose when up against the unrelenting power and cunning of the financial sector, so they need our back up. My preference for smaller less powerful financial institutions is not necessarily the right solution, but it almost certainly points in the right direction.
This movement shouldn’t be restricted to the left, both those who are aghast at the Tory’s treatment of the welfare state and those angry with their paltry pittance of a pay packet need to unite against a common enemy. A financial system which serves itself more than it serves households, small businesses and entrepreneurs and which poses a massive risk to the whole economy once a generation. Until that beast is tamed, wrenching crises will continue.