Have we learned nothing from the financial crisis?

Rescued banks are returning to the 'casino-style speculation that brought us trouble in the first place'

• 
• • Ashley Seager
  • The Guardian, Monday 7 September 2009
  • Article history

Have we learned nothing from the financial crisis of the past two years? Very little, it appears. Optimists say the markets are up and economic recovery is upon us. Bodies such as the Organisation for Economic Co-operation and Development are revising up their forecasts for world growth this year and next and assuming we are out of the woods.

And the investment bankers are out there making money again, popping the champagne corks and telling themselves how clever they are – after all, they have managed to pass a good proportion of their huge losses on to us, the taxpayers, and are sitting at the roulette table again.

There is a danger that in spite of all the talk among the G20 finance ministers at their weekend summit about the need to do something aboutbankers' bonuses and banks' capital ratios, the drive to reform could fade as the economic crisis recedes.

Hence the recent call by Adair Turner, chairman of the Financial Services Authority, for some sort of action against the excess profits banks make on some of their casino activities, which he correctly labelled "socially useless".

Sure, Gordon Brown eventually, but reluctantly, signed up to a joint letter with French president Nicolas Sarkozy and German chancellor Angela Merkel last week pledging to look at ways to cap bankers' bonuses. But that merely echoed a similar statement by the G20 earlier this year and, as Turner suggested, only deals with a symptom of the problem, not its cause.

In spite of Merkel and Sarkozy's admirable desire to do something about all of this, Tim Geithner, the US treasury secretary, made it clear that the US thinks that forcing banks to hold more capital is a far better way to prevent future crises.

Alistair Darling, the chancellor, said that while he was as upset as the next person about the reappearance of large bonuses only months after huge taxpayer bailouts of banks, he thinks capping individual bonuses is simply not practicable.

So ministers decided at the G20 to pass the bonus problem on to the as-yet untried Financial Stability Board to look at and report back on. Luckily, some clear thinking is still going on out there. Later today we will have the launch of the annual trade and development report from the analysts at the United Nations Conference on Trade and Development (Unctad). It will put the case for far-reaching reform of the world's financial system and foreign exchange markets so that they serve the people and productive economic investment, rather than the other way around.

Bubble

And it will question the extent to which there is a genuine self-sustaining economic recovery going on, arguing that falling wages present a huge danger to the world that is being too often ignored by many economists and policymakers.

"All these rises in markets are said to reflect economic recovery but it is just another bubble," Heiner Flassbeck, Unctad's chief economist, told the Guardian. "These markets are reflecting a recovery that is not there. Wage deflation is a huge danger everywhere and this is not being recognised.

"Banks have been rescued by the taxpayer and are just returning to casino-style speculation that brought us trouble in the first place. We need to focus banking on supporting investment in productive businesses."

The report will argue that commodity markets, which have seen big rises in prices recently, are not reflecting a genuine increase in manufacturing output or trade, simply that speculative money is flowing in to them.

It devotes a chapter to what it calls the "Financialisation of Commodity Markets". Its analysis of causes of the financial crisis, and how to prevent another one, is a fine piece of work and does not pull its punches with regard to G20 policymakers.

"Policymakers should have been wary of an industry that constantly aims at generating double-digit returns from an economy that is growing at a much slower rate, especially if that industry needs to be bailed out every decade or so," it will say.

Because financial markets are more complex and risky than markets for products, it argues, "a greater degree of prudence and supervision is necessary, including more regulation – not deregulation as in the past. It is therefore surprising that the G20 has paid so little attention so far to the necessary reforms of the financial system."

Unctad comprehensively rebuts the arguments of parties such as Boris Johnson and the British Bankers' Association that what's good for the Square Mile is good for the country.

"Financial markets in many developed countries have come to resemble giant casinos; which almost always win and when they lose they get bailed out, while everybody else loses.

Scornful

"A large segment of their activities is entirely detached from real sector activities. The crisis has made it abundantly clear that more finance and more financial products are not always better, and a more sophisticated financial system does not necessarily make a greater contribution to social welfare."

The point is we are all going to pay higher taxes and see cuts to public spending for at least a decade as a result of this mess and many people may never get another job. Therefore we have a right to cut the City down to size if we want to. It's our money, remember.

Unctad's report also takes up the theme taken up by the Queen recently when she asked why so few people had spotted the looming crisis in advance.

It will point out that the financial services industry managed to "capture" policymaking in a number of important countries (certainly Britain) into believing the myth that what was good for the sector was good for the economy.

But Unctad is no less scornful of academic economists who, it argues, should have known better than to believe the argument for free markets.

"In view of the vast literature and rich empirical evidence on financial markets' proneness to excesses and crises, it is surprising that there was so little challenging of the popular belief in the supposedly unchallengeable wisdom of unfettered market forces."

The report lays out a prescription of how supervision of markets can be hugely improved and how the foreign exchange markets could be reformed to prevent speculative, damaging swings in exchange rates in many countries that bear no relation to the underlying economic health of a country.

We cannot let the chaos of the past two years happen again. We have to change the current system and make it work for us. Our policymakers seem too tired to do much about it. But failure to do so will leave the clock ticking down towards the next crisis.

Source: http://www.guardian.co.uk/business/2009/sep/07/financial-crisis-happen-again