“For many centuries, money and banking were financial alchemy, seen as a source of strength, when in fact they were the weak link of a capitalist economy,” writes Mervyn King in his new book.
As Governor of the Bank of England for a decade from 2003, having previously been a leading academic economist, Baron King of Lothbury has long been at the heart of the British policy-making establishment. Despite that, and belying his mild manners, The End of Alchemy is a fearlessly honest explanation of the 2007/08 financial collapse, providing disturbing insights into what sparked “the worst banking crisis the industrialized world has ever seen”.
Barclays is to shed around 14,000 jobs in 2014, we learnt last week, more than half of them in the UK. These head-count cuts are largely about the on-going process of humdrum branch closures – not only in Britain, but also in Spain, Italy, Portugal and France. Such job losses are sadly inevitable, given the rise of mobile and on-line banking.
This Barclays announcement, though, was spun rather differently. Rather than discussions about banks’ reduced presence on the High Street, our airwaves were instead filled with tales of Barclays’ “courage”, as it distanced itself from “casino banking” in a “decisive break with the past”.
Some 2,000 of this year’s job cuts are in Barclays’ 26,000-strong investment banking division. More such posts are to go, the bank tells us, in 2015 and 2016.
It’s five years since the “sub-prime crisis” began in earnest. Lehman Brothers filed for bankruptcy on 15th September 2008. The resulting financial meltdown lead to the first global recession in living memory, so causing countless job losses and widespread human misery.
Questions such as “what have we learnt?” and “could it happen again?” are of sufficient importance and complexity to fill thousands of columns inches, running to millions of words. I offer here, then, a necessarily brief explanation of why I believe the Western world’s policy response to sub-prime has been deeply flawed, and why we’re now even more vulnerable to another debilitating systemic collapse.
This coming Wednesday, the House of Lords debates the second reading of the government’s banking reform bill. Now we’re in the holiday season, and the sun is shining, the prospect of an ermined discussion about bank regulation may strike you as deadly dull. But you’d be wrong.
This draft legislation forms the centre-piece of the UK’s response to the sub-prime collapse, the related banking meltdown and the resulting economic damage meted-out to millions of British workers. It’s unfortunate that such vital measures are being considered by the Upper House only at the fag-end of the Parliamentary year, when the Commons has already risen and media scrutiny of Westminster is on go-slow.
This weekend, I’m feeling somewhat vindicated. More significantly, perhaps, for the first time in quite a while, I’m also rather hopeful. Vindication comes in the form of the latest Stability Report from the Bank of England’s Financial Policy Committee, published last Thursday.
For a long time, this column has focused on the multi-billion pound undeclared losses on the balance sheets of the UK’s largest banks as the major reason why our economy remains moribund, unable to stage a recovery. The FPC has just shown that it not only agrees with that view but wants to take some action.
With just over a week to go before the US election, it’s too close to call. President Obama is rediscovering his touch as a ladies’ man, polling well ahead among female voters just as he did when he won the White House back in 2008.
Republican challenger Mitt Romney, meanwhile, is the choice of most men – or at those who intend to vote. The outcome of this titanic struggle really is in the balance, not least in the likes of Ohio and Florida, the all-important “swing states”.
Finally, the British political classes are starting to get it. Finally, a head of steam is building. Over the last week, calls to impose a proper division between investment and commercial banking have become louder, more authoritative and part of mainstream debate. Pressure for the introduction – or re-introduction – of this crucial split could soon become irresistible, however much the politicians wiggle and the investment bankers deceive.
Until now, it’s been mainly nerds like me who’ve advocated a full Glass-Steagall separation. Given the vested interests that would lose from this change, we’ve been lampooned for our “hot-headed” views. Yes – our message is awkward. Life would become difficult (and less lucrative) for a lot of powerful people, were we to prevail. Yet we “Glass-Steagallers” are right. We have history, logic and common sense on our side. And now – thanks to Barclays ex-CEO Bob Diamond, and “Liborgate” – we also have political momentum.
The eurozone crisis seems on the cusp of some kind of denouement. The trouble is that no-one can possibly know what that long-awaited outcome will be. Maybe Germany will finally relent and agree to massive monetization and “debt-pooling” – effectively bailing-out the rest of the eurozone. Or perhaps, once again, the eurocrats will “extend and pretend”, building an even higher financial firewall, while continuing to muddle through.
The danger is, though, that the markets lose patience, sparking a violent “Lehman style” financial meltdown, with all the global fall-out that would entail. While that would be disastrous, the worst of all possible outcomes, there is a growing sense that it is only another “Minsky moment”, combined with some serious civil unrest, that will force the eurozone’s main policy players to face the really tough decisions.
I don’t know Mervyn King particularly well. I’ve talked with the Bank of England Governor a deux just a few times over the years, always at official functions. Rather than Whitehall and Threadneedle Street, my vantage point as an economics commentator has been the world of international business, initially as a correspondent and, more recently, as a practitioner. I can barely remember the last time I was in the same room as Mervyn King.
I mention all this because what follows may differ from other commentaries you’ve recently read. At a time when British economic policy-making has descended into shrill claims and finger-pointing, I don’t want anyone accusing me of ulterior motives. That will, no doubt, happen anyway but one must learn to live in hope.