Despite the great crash, governments still seem to be mesmerised by the power of our financial institutions, writes Alf Young
FINANCE is too important to be left to financiers. So said Larry Summers the other day. The man who lost out to Janet Yellen in the race to become America’s next central banker was speaking at an IMF research conference as the UK government announced another independent inquiry into how another UK bank, the Co-op, has managed to hit the buffers.
If money really does make the world go round, and managing money markets is too important to be left to bankers and the wider financial services industry, what are politicians going to do about it? Judging by the venomous exchanges between David Cameron and Ed Miliband this week over the Rev Paul Flowers, not a lot.
The Tories, struggling to defuse the Labour leader’s cost-of-living offensive, saw their chance to smear the opposition with the disgraced and now-arrested former Co-op Bank chairman’s subterranean excesses. The Telegraph columnist Peter Oborne even went so far as to suggest that “lying, cheating and breaking the law” are deep in Labour’s DNA. Presumably the party of John Profumo, Jonathan Aitken and Jeffrey Archer has undergone some form of purifying gene therapy.
The tragic plight of the Co-op certainly poses hard questions for Labour, whose direct links with the UK’s dominant mutual movement go back to the founding of the Co-operative Party in 1917. In the current House of Commons, 32 MPs sit as joint Labour and Co-operative Party members. But trying to pin the fall of the Co-op Bank on the egregious excesses of one man makes a nonsense of what we already know.
Eight months before Flowers even became chairman of the Co-op Bank, it had already merged, in August 2009, with the Staffordshire-based Britannia Building Society. That’s where the rot really set in. If I dare even mention it, in this period of exclusively binary debate in this part of these islands, there are strong Scottish strands to this saga.
Back in 1990, Britannia had merged with Glasgow-based FS Assurance, one of many mutually-owned Scottish life offices still operating on their own account at that time. The F stood for Foreman and the S for Staff. FS was originally a friendly society, formed in 1899, active mainly in Clydeside’s thriving engineering industry.
After the merger, FS was renamed Britannia Life. From its base in Glasgow’s Bothwell Street, it rapidly grew its funds under management. By 1999, when a majority stake passed to Britannic Group, they had topped £19 billion. Today the Glasgow operation is part of Ignis Asset Management, a subsidiary of the listed Phoenix Group, the UK’s largest consolidator of closed life assurance funds.
Some of the other once-familiar names of mutually-owned Scottish life office live on, if only on Phoenix’s books. Britannia Building Society used the proceeds of its sale of its Scottish asset management business to Britannic Group to stoke up its own property lending in the early years of this century.
When the merger with Co-op Bank went through in 2009, there was a lot of questionable commercial property and buy-to-let loans on Britannia’s books, a toxic legacy from those bubble years. That and the cost and technical complexity of putting the Co-op and Britannia computer systems onto a common platform were challenging enough.
Then came the opportunity for the growing Co-op Bank to expand massively again, by buying another 632 established branches. Lloyds, having swallowed up the Bank of Scotland after the UK government bailed it out, was ordered to sell the tranche by the European Commission, under state-aid rules. The Co-op was told by the UK regulator in April last year it didn’t have enough capital to buy them. But, three months later, it was named as preferred bidder in the £750 million deal.
George Osborne hailed the news as creating “a new banking system for Britain that gives real choice to customers and supports the economy”. Now even some on his own side, like ex-leadership contender David Davis, are demanding to know why the Treasury allowed the Co-op bid to proceed. There’s even been a report that the chancellor personally intervened with Brussels in May, 2012 to ease the rules under which a deal could be done.
Despite the consequences of the great crash still being so fresh in all our minds, politicians and their advisers still seem bewitched by the enduring power of 21st century financial capital. They woo it assiduously for the jobs it creates and the tax revenues it generates. These days making money seems to matter more, a lot more, than making things. Even the near-death experience of Scotland’s two oldest banks in 2008/09 doesn’t appear to have caused our First Minister to think again.
Earlier this month, Alex Salmond was in Hong Kong. As I noted in passing last week, there he was promising that, with independence, Scotland would be an even more bigger force in global financial services than it is now. When he praised HSBC, founded in Hong Kong by a Scot, as “just one example of Scotland’s contribution to financial services”, I trust he wasn’t contemplating some of the things HSBC has been getting up to in recent years, like allowing itself to be used for money laundering for Central American drug cartels and terrorists.
The man in charge at the time as chief executive, then chairman, was Stephen Green. When he left the bank he became Baron Green of Hurstpierpoint and, for a time, trade and investment minister for the Westminster coalition. He shares one thing with Paul Flowers. Green is also a man of the cloth, an ordained Church of England clergyman.
When Larry Summers told that IMF conference that finance is too important to be left to financiers, he didn’t go on to talk about how political power finds it harder and harder to control the increasingly frequent excesses of financial power through effective regulation. However, what he did talk about, were it to actually come to pass, has much more profound consequences for all of us and how we live our lives.
Summers talked about the prospect of what economists call “secular stagnation” becoming the new norm for much of the developed West. The old norm was to achieve a natural rate of interest, one that allows any economy to operate as near full capacity as possible (hence generating near full employment) while keeping inflation low and stable.
But the great crash has pushed that natural rate deep into negative territory. And, with central bank rates already near zero, what else is to be done to prevent years more of depressed growth, under-investment and ongoing public austerity? Might we all, instead of facing rock-bottom savings rates, actually be penalised for saving instead of spending?
As Paul Krugman has pointed out, this is a possible future world where “virtue becomes vice and prudence becomes folly”, where “fixating on debt and deficits deepens the depression”. If we are heading where Larry Summers fears we may be heading, might economies dependent on regularly re-occurring asset bubbles become all but inevitable?