WITH A FEW HONOURABLE EXCEPTIONS, THE FINANCIAL SERVICES INDUSTRY IS A FESTERING SORE OF CORRUPTION.
It needs to be cauterised in the interests of Society. Can politicians do it??
The political classes in many countries are facing a terrible problem. They are caught between justified public anger about the finance industries and the lobbying power of the vastly rich banks.
This problem is probably worst in Britain, because governments since the first Thatcher administration have systematically undermined the “real” economy, especially science and technology based industries and pandered to the City of London finance industries. This all started with deregulation of the money markets in 1986. Since then, politicians of all parties have progressively removed any semblance of control over the investment banks. The banks in turn have grown more and more aggressive and venal; speculating rather than investing, swindling their customers, inventing ever more complex ways of gambling ; whilst rejecting any serious regulatory oversight over their antics.
Banks and politicians
Right now, most politicians spend time posturing and blaming each other for the mess for which they all share the blame. We are faced with the spectacle of government ministers expressing their outrage in quite extreme language; whilst proposing pathetically inadequate actions that will change very little. Clearly, they are terrified of the banks. The Labour opposition has not yet indicated what it will do if in government. But it has made a very good case for an enquiry into the problems of banking and reform that would be independent of politicians. The behaviour in parliament and the mess made by a parliamentary committee in quizzing Bob Diamond of Barclays make the strongest possible case for a forensic a-political approach.
It would appear that most politicians are ignorant of what the banking industry is really like. One proposal indicates the staggering naivety of some politicians. Vince Cable, UK Business Secretary proposes that “shareholders” should hold the directors of banks to account. His definition of shareholders, the “ultimate owners” of banks are in the main Institutional Investors, who are part of the financial services industry and themselves responsible for a range of incompetence and mal-practice that rivals investment banks!
Cable's “shareholders” are supposed to be the agents of pension fund members, individual investors and savers, pensioners and the army of people who actually own the money invested through the financial markets. Do this army of ultimate owners have a voice? Right now, emphatically no!
The culture and habits of investment banking
So it is clear that many politicians clearly can't or don't want to understand the scale of the problems. Large parts of the financial services industries lack any sense of moral purpose. The reasons for this are quite understandable. One is that manipulating money to simply make more money lacks the intrinsic value and satisfactions to be gained from such activities as making good cars, running good restaurants, providing good healthcare, or helping pupils to learn. Another lies in the aggressively inward looking nature of the finance industries, which in effect are a massive global tribe who share the same values and are immune to the views or interests of the world outside their boundaries. The culture of investment banking has been frighteningly described in this site by a psychologist with experience in the industry. (See “The sick Personality of the financial markets”).
These two factors alone mean that tinkering around the edges with structures and governance will never reach the roots of the problems. And that is really all that central bankers, politicians and most regulators are currently proposing.
Cable also fails to understand that power in the industry is tightly in the hands of the most aggressive and amoral - and that people who might wish to stand against corruption are summarily dealt with. Power is a corrosive commodity, and the finance industries use it internally to deal with recidivists and externally, to coerce and bribe politicians and the media. This makes finance almost impervious to external criticism and appeals to reason. Extensive externally imposed and co-ordinated action is needed. Because resistance is likely to be ferocious, those responsible for change will need to persist in the long term.
What should be done?
So, accepting the obvious; that the financial services industries represented by the big commercial banks, investment institutions and the like are a deadly poison to the health of the wider economy and society, what can be done to restore them to being useful contributors to the general well-being?
Some short-term measures
- Introduce a Licence to Practice for people in the finance industries. These should include investors, traders and those who are supposed to manage them. This would include directors. So, for example, Marcus Aegis, who was chair of Barclays Bank and remains chair of the British Bankers' Association (!!) and Bob Diamond, CEO of Barclays would immediately be disqualified from working in the financial services industry. The permits to practice would be managed by a statutory body independent of politicians and the industry.
- Launch a National Investment Bank(s) with a strategic remit to stimulate and support smaller companies and promising technologies. Many successful countries like Germany and South Korea have them. Run it on co-operative lines with a strong independent board of people who are from outside traditional finance. Encourage investment by individuals and trusts, with tax incentives and some downside protection to individual investors who keep their money in for the long term. Disqualify Hedge Funds and the like from participating.
- Banks and institutions found guilty of serial malpractice should have their assets and operations seized and given over to mutual bodies to manage.
- Introduce an offence of criminal fraud for those who are proven to practice or condone financial malpractice. Make indictment easy; prosecute in order to ascertain possible wrongdoing, suspend those under investigation until proven innocent.
- Split Casino Banks from retail banking immediately. Prevent investment banks from using retail banks' savings and investments to SMEs and individuals to speculate.
- Shut out Tax Havens. Make it a condition of UK citizenship that UK tax is paid on world-wide income.
Longer term measures
- Make financial education in schools compulsory, so that the populace is better able to understand risk and the management of their financial lives. This is as important as health education.
- Establish a Financial Education Commission to provide objective advice and information to the wider adult population.
- Put a stop to overt and covert lobbying by the finance industries. Make all political lobbying open and transparent. Stop political contributions above very small sums by people and institutions with special interests. Make all contributions declarable. Fund campaigning and the basic costs of political parties through an electoral commission.
- Disqualify politicians from taking any roles and remuneration from industry, especially finance, for five years after finishing civil service or political careers.
- Introduce institutions that will campaign on behalf of real shareholders. Provide these institutions with statutory backing. Make pension fund trustees accountable for representing the interests of their members to institutional investors. Give them the power to force institutional investors to vote as directed by members and trustees. Include legal and ethical behaviour as part of this remit.