DEMOCRACY DEFEATED BY INVESTMENT BANKS?

"Business as Usual"

These excerpts from the BBC News website of January 11 2011 give a flavour of how the democratically elected government representing the British people is proceeding in its attempts to make the investment banks contribute to society and the wider economy; not to mention taking their share of the extreme pain they have meted out to the nation - or at least its less fortunate and wealthy members.....

This is a story about British politicians and banks, but it must be said that the global investment banks have meted out huge damage and misery to many millions of people in many countries over the last decades - and continue to do so with no apparent end in sight. So this story will have resonance in other countries with democratic political systems that appear to be incapable of reining in the power of the banks for the good of society.

In Britain....

On January 10th 2011, the UK Cabinet office announced that it had withdrawn from negotiations with the investment banks over bonuses, saying:

"We've made a broad statement which is about the need to see some restraint and some responsibility from the banks, but we are not going to set bonus pools for individual banks," the prime minister's spokesman said.

Chancellor George Osborne has warned banks that no measure "is off the table" if they refuse to act on concerns over the size of bonuses.

The comments come amid reports that payments for leading executives will total £7bn this year.

Mr Osborne said he hoped (!) talks would lead to banks lending more, and paying lower bonuses "than they would otherwise" have done.

He also said: "I can confirm that we are now in discussions with the banks to see if we can reach a new settlement where the banks pay smaller bonuses than they would otherwise have done, are more transparent about those they do pay, make a greater contribution to local communities and regional economies, treat customers more fairly, and above all lend materially and verifiably more than they were planning to lend to the businesses of Britain - especially the small businesses - so that they can grow and create jobs this year."

Prime Minister David Cameron has said the coalition cannot "micromanage" banks and his deputy Nick Clegg told the BBC he understood public "anger", but restoring lending to people and firms was the priority.

Mr Diamond, the Barclays chief executive, was questioned by the Treasury select committee over whether he would take his bonus this year.

He said he would discuss the issue with his family before deciding what to do and was determined to act "responsibly", adding that the government had not urged him to curb the amounts given out.

The total annual payments meted out to bank staff this year are expected to reach £7bn, down from £7.3bn last year. (!!!!)

Abject surrender or collusion? The "distributive coalition of interest" between top politicians and the banks

The latest weak and vacillating attempts to reform banking by a coalition government led by the Conservative Party seems a very poor response to an economic and financial disaster caused by the investment banking industry, which was then bailed out by the taxpayer.

The scale of the surrender to the bankers can be judged by reading the introduction to a report on the banking from the Centre for Research into Socio-economic Change (CRESC), the respected research institute connected to the University of Manchester.

In short, the report reveals:

• That close connections amounting to dependency between politicians of both major parties and the banking industry have resulted in a false "narrative" that focuses only on competitiveness of banking in London - and almost completely avoids touching on the real impacts of banking on the UK economy
• Using the narrow and misleading issue of banking (not industrial) competitiveness, several reports for the national government and the Mayor of London have been compiled by committees consisting almost entirely of bankers. The CRESC report beautifully describes this as: "Finance reports on finance by telling stories about finance". This is almost totally unprecedented behaviour for government, which in times past formed committees of enquiry with a good balance of views amongst their members.
• The biased reports of these committees have been used by politicians as the material for constructing national policy towards the banking industry. Thus the banks and government are tied together by a knot of self interest which excludes sensible objective debate.
• This process is described by the researchers as a "distributive coalition". In other words, both politicians and bankers benefit from a relationship that produces funding for the Conservative Party particularly and for individuals such as Tony Blair when they retire. A less polite way of describing this might be "I'll scratch your back if you scratch mine".
• And of course, politicians of both major parties have also sought to avoid exposing how wrong they were in supporting lightly regulated banking as a major beneficiary to the UK economy.
• Then, in the short term tax revenues from banks have shored up the exchequer as other sectors have declined, in the main because of the long term behaviour of the banks. Politicians are thus nervous of annoying the banks. This vicious circle of desperation has to be broken if the British economy is to recover and industry to have a chance of competing in international markets.

The CRESC report examines the so-called "benefits" bestowed on the economy by the banks.

Banks as a source of social and economic value?

One of the central claims of the bankers has been the huge social and economic value to the British economy of the investment banking industry.
The CRESC team put this "value" claim under the microscope.
They reveal that:

• Tax revenues from the finance sector in recent years are offset by the immediate cost of the bank bail-out. In the five years to 2006/7, the finance sector paid and collected £203 billion in taxes, but the direct and upfront cost of the UK bailout are £289 billion, probably rising to £1,183 billion (2010 figures). These figures ignore the huge economic and social effects of increasing poverty, unemployment and long term business failure.
• "In terms of job creation, the finance sector directly employs no more than 1 million workers (mainly in retail banking), and numbers do not increase in the boom years. In total the banking and support industries employ about 6% of the total UK workforce".
• "The business model of wholesale banking concentrates employment and wealth in a small corner of the UK, impoverishing other regions. In its present form, finance is a pro-cyclical activity with a limited job creating capacity and a proven ability to disrupt the economy at great cost to the taxpayer".
• (Investment) "Banking delivers little social value and instead operates "for itself". (Essentially this means that investment banks make a large proportion of their profits by creating financial instruments that they trade amongst themselves, whilst milking the retail arm which sells to ordinary people and provides feedstock for the investment banking transaction machine. These transactions are of no real social value but provide the wherewithal for huge bonuses).
• "The problem of the pre-2007 bubble was not that there was too much debt, but that too little credit was applied in the right places. The finance sector undermined sustainable growth by inflating asset price bubbles rather than underwriting any kind of productive investment".

To sum up....

The investment banks have soaked the average saver/citizen to provide funds for speculative transactions between bankers which have no social value but provide the basis for huge bonuses.

They create asset price bubbles that collapse and have to be bailed out by the taxpayer at enormous cost in terms of tax income but also through the misery and impoverishment of a large part of the populace.

They also cause widespread destruction of useful industry, including advanced technologies by circulating funds amongst themselves for speculation rather than useful investment. This completely destroys the original purposes of banking, which were to give savers a decent return and provide funds for the long term development of productive industry.

They have bullied and bribed senior politicians of both major parties into letting them continue with "business as usual" after the disastrous crash of 2008. Many politicians in turn have sought to justify their inertia and collusion by spreading narratives about the positive social and economic effects of banking and the consequences that might flow from displeasing investment bankers.

Unless different forms of finance and investment are created, Britain is destined to become a relatively poor country, denuded of advanced technology and skilled occupations, uncompetitive in world markets, with a permanent balance of payments deficit. The country is already well down the slippery slope of international uncompetitiveness; continued pandering to the investment banks will cause the decline to accelerate.

The tragedy is that this decline is mainly the result of ignorance laced with greed on the part of political and financial establishments. Not so long ago deliberately seeking to undermine the wellbeing of a country from within would have been called "treason".

Sources

The material in this article is drawn mainly from a report by CRESC, but also excerpts from the BBC news website and the "Daily Telegraph", a right-leaning UK newspaper.

CRESC report
"An alternative report on UK banking reform

A public interest report from CRESC jointly authored by a working group of practitioners and academics based on the ESRC Centre for Research into Socio-cultural Change, University of Manchester".

"This report is dedicated to C. Wright Mills, who studied unaccountable elites and defended democracy".
www.cresc.ac.uk