The nonsense of the big banks

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The nonsense of the big banks

The bankers created the worst financial crisis since the 1930s. And now they think they can continue as before. David Ransom suggests other ways of continuing.

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A protester in Hong Kong, October 2014. © Getty/Bloomberg/Brent Lewin

I was a trainee banker for a short time between 1968 and 1970. I was with a group of young only white men in the City of London. A retired bank manager from Tierra del Fuego was training us. After our training they gave me a job in Montevideo in Uruguay.

A few months later the bank clerks there went on strike for more money. The army arrived and they told the bank clerks they must return to work or lose their jobs. A large army colonel took the manager’s office and some soldiers brought a few bank clerks back to their desks. I left the bank. I thought that banking was too boring. So when I hear that the bankers need cocaine, I am not shocked. I know that it is a very boring job.

After a couple of years, the rest of the country was in the hands of the army. They began to imprison, torture, and exile more of their own people than any other country. Perhaps the banks were not mainly responsible. The military blamed Tupamaro leftist guerrillas. But the banks benefitted most.

This was the start of corporate globalization and free financial markets. In the weak Uruguayan economy, the military dictatorship passed the growing private debts of the rich and their banks to the Uruguayan people. The Uruguayan people became part of the ‘Third World’ debt - which means the banking crisis.

The military generals and a Washington Consensus at the International Monetary Fund and the World Bank brought a number of negative changes to Latin America. These were privatization, the export of basic materials, foods, and products, fewer jobs and public services, lower wages, regressive taxation, stealing from the natural environment, loss of human rights, and paying private banks for debts that were their own. The result was that only the rich had money to buy anything, economies failed and, in Uruguay, there was very bad poverty for the first time.

In this way I started to think that banks and financial markets in the Majority World are not interested in productive finance but in ‘neoliberalism’. Since 2008 people in the Minority World have heard the word, ‘neoliberalism’. That is because ‘austerity’ comes from it.

Neoliberalism has grown quickly. We see it in free-trade agreements and the World Trade Organization, the Transatlantic Trade and Investment Partnership (TTIP), and the Trans-Pacific Partnership (TPP), with their ideas of free financial markets and banks as the leaders.

It is perhaps strange but financial crises are part of the process. Some people say there were 147 banking crises worldwide between 1970 and 2011, and they always had the same desired result – money given from public funds, followed by some form of neoliberal ‘structural adjustment’.

I am still very surprised by what the banks were really doing: illegal practices, breaking sanctions, not paying taxes, bad insurance, selling bad products and services, interest- and exchange-rate manipulation, gambling, personal greed and personal wealth. The financial ‘service’ treats its customers very badly.

The banks paid for credit-rating and audit corporations to help them. The banks also controlled bad regulators who said yes to these corporations. It makes me doubt capitalism.

The public are very angry that bank bosses continue to pay themselves a lot of money. The bonuses that bankers receive makes inequality and social injustice. The more you want to very, very rich, the more you need to be a banker or financier.

When banks are “zombies” - dead and alive

Banks are not useful to society. 60 per cent of the money they lend is for private houses and mortgages. Don’t forget that this started the 2008 crisis. Property is perhaps the easiest way for banks to make money but no-one says that property is productive. High property prices may make more money for a few people and for a shorter time than working in a job. But for other people and for our children this makes homes too expensive to buy. When the 2007 credit crisis came, the banks had no idea what anything was worth and they stopped lending money. They were in fact dead.

But there is a strange way of coming back to life only for the banks. Public money can keep them alive because it is too difficult to close them down even when they are worthless and they do nothing useful. These banks started when the Savings and Loans crisis began in the US in 1987, and they survived in Japan long after its own banking crisis in 1993. They are called ‘zombie’ banks.

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Governor of the Bank of England, Mark Carney. He is not too worried about private debt. REUTERS/Pool/Antony Devlin

And I think all private banks are now zombies. You can see this from the big public efforts to bring them into some form of useful life. If we forget all the public money given to banks and the bribes, there are also trillions of dollars of free public money given to them by quantitative easing, when the banks print money. This is like dropping free cash directly onto everyone’s heads. The result of giving the money to the banks: bigger profits and bonuses, an increase in the price of assets owned by the rich – mainly property, of course – and arguments between economists about if it has made a difference to the real economy.

And so it continues. The big banks are too big to fail and too big to work well. Result: they get bigger and fewer and control every national banking system. They receive public money - perhaps $300 billion every year in the euro area alone. This is because financial markets think since 2008 that public money will save them again and this means they borrow more cheaply and lend more riskily.

They must raise more of their own capital (the only money that is actually theirs) to reduce the risk of help from public money. Result: avoiding taxes, the minimum levels of capital and still no increase in productive lending. So we must regulate them more. Result: new chances to play with the rules. There is no way to explain the size of bank bonuses.

Meanwhile, financial markets just keep on growing. Their assets (loans) in Britain have already grown to about four times the size of the country’s entire annual output. They are set to be 10 times the size by 2050. The Governor of the Bank of England is quite happy about this. He says that size (and, of course, good business) is less of a problem than safety.

But what if government deficits were set to do the same? What makes private debts less of a problem than public ones? And who could save them? In 2010 Andrew Haldane, then the Director of Financial Stability, now Chief Economist at the Bank of England, thought that the banking crisis cost between $60 and $200 trillion.

That’s a lot of debt. If a crisis comes every 20 years, Haldane said that banks should pay more than $1.5 trillion every year to repay the debt. But he said that collecting this debt would kill the banks. So there were no plans to do so. Some debts, and those of the banks in particular, are less important!

Greed

Finance is a public utility, not private property. What makes it possible to save the banks with public money again and again? The fact that automatically they can use public resources and tax revenues. This is not democratic. It is greed. And private banks can also create all the money in circulation. This gives them economic and political power. We should stop the banks printing money. The banks should be mutuals and only be there to help their customers. They should be small and local, and in communities they have learned to understand. They must be there to help in the face of the problems of climate change, and to create productive, sustainable employment.

It would be a good idea to rely less on regulation and more on what actually works. For example, transaction taxes on currency and commodity exchanges. They have the effect of stopping dangerous speculation and getting back public money. They are also difficult not to pay. And they are what runs financial systems: taxes, surely best raised from the system itself. Everyone agrees with this. Only the power of the banks stops it. The European Union is still thinking about it.

There would then be a good chance of bringing the big zombie banks back to life.

Let the banks live if they can, without public money to help them. Let’s stop the damage they do. Another banking crisis is very possible. So we need to be ready next time. It is not a good idea to repeat the same mistakes It seems that battles between financial markets and democracy will get worse, especially in the rich world, which has the biggest debts. The effect of the Great Recession on new economies has been less because there is some democracy and social justice there.

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José Mujica sets a good example at his home outside Montevideo. Matilde Campodonico/AP/Press Association Imagest

Let’s go back to Uruguay, where I stayed for a time quite recently. For five years, until 1 March 2015, José Mujica was its elected president. He was a Tupamaro guerrilla and was tortured by the military and was in prison for 13 years.

As president, he continued growing flowers and living with his partner on her small farm. He continued with his own informal clothes and gave away 90 per cent of his presidential salary. Adult Uruguayans can now grow marijuana bushes in their back yard; gay people can marry, women can have legal abortions. Mujica says that money is not the most important thing in life. And the country is not in a crisis. It is getting better and better.

One warm evening outside Montevideo, a young friend said to me: ‘I’m not particularly political, but I do feel that my views are important.’ No one has said anything like that to me for a very long time. Uruguay may not be a perfect country – you can still be robbed in the street. But there is hope.

NOW READ THE ORIGINAL: http://newint.org/features/2015/05/01/banking-keynote/ (This article has been simplified so the words, text structure and quotes may have been changed).