Our era has witnessed avarice, narcissism, corruption and larceny on an unprecedented scale. The recent international economic catastrophe is the “alpha crash” because the men responsible were almost all alpha grade business school and university graduates, who well understood the irresponsible, reckless risks they took with investors’ savings, but, driven by personal greed, they took them all the same.
Mary Schapiro, chair of the Securities and Exchange Commission in the United States, said: “Instead of steering away from the riskiest financial products, they turned towards them.”
There may well be another crash – and soon – if “extreme measures”, in the words of Bank of England Governor Mervyn King, are not taken to stop it. However, such action is unlikely to be taken while big bankers and super wealthy individuals remain the largest sources of funding for Britain’s main political parties. The irony is that those who most need controlling are those who politicians can least afford to offend.
In the run-up to the general election, the Liberal Democrats were the most outspoken about bank reform and regulation. Vince Cable proclaimed the need to “transform the banking industry from head to toe”. He complained about our tax system “creating a corrosive sense of unfairness with millions of people paying increasing amounts of tax. This includes people paying 40 per cent tax on relatively moderate incomes. The rich and well-advised exploit loopholes and end up paying 10 per cent tax.”
However, now that he is the Business Secretary, Cable’s enthusiasm for reform and King’s call for “extreme measures” have been put to one side. Instead, we have been promised a commission to study the problem.
That might actually get somewhere if it were chaired by Paul Moore, the former head of regulatory risk at HBOS who was sacked when he told his employers they were being reckless. It’s more likely that the Government will choose someone from the City who concludes no major changes are necessary.
But is there anyone who does not understand that criminality lay behind the crash, with banks paying expensive lawyers and accountants to enable them to commit what amounted to legalised fraud by sidestepping financial regulation. Do we need another commission to explain what the 40 million unemployed around the world already know?
While the Conservatives have dropped the proposal to dismantle the Financial Services Authority, where is the resolve to clarify
its objectives, the funding to increase
its resources and the commitment to strengthen its powers?
We are warned to prepare for draconian cuts, but it’s clear these will mostly affect the poor and the middle classes, who have already been hit by the crash, while leaving the those who caused it free to continue as before.
The truth is that there plenty of wealth to go round in this country, if only politicians could summon up the courage to require their paymasters to make a fair contribution from their massive personal and corporate wealth.
It’s salutary to reflect that when Tony Blair came to power in 1997, Britain’s 1,000 wealthiest inhabitants were worth £98 billion. Ten years later, they had benefited from the hands-off approach to financial regulation on the part of Blair and his Government and were worth a total of £335.5 billion.
We could get out of recession by imposing fair taxation and regulation on those who have done so well by plunging us into it. The combined wealth of £335.5 billion suggests annual earnings of around £17 billion. If the average tax rate were applied to these earnings, the top 1,000 people alone would be paying £6 billion in tax. That’s exactly the amount the coalition Government plans to squeeze out of our already under-funded economy, thereby running the risk of plunging us into a 10-year recession, similar to the one Japan suffered when it imposed radical cost cutting.
Sadly, politicians are terrified of offending the rich and powerful. It is this link that caused the crash. When President Bill Clinton succumbed to lobbying by bankers and repealed the Glass-Steagall Act in 1999, he set events in motion that were bound to lead to economic calamity at some point.
The Glass-Steagall Act was introduced after the 1932 crash with the aim of extracting investors’ savings out of the hands of investment bankers. Clinton has subsequently admitted that its repeal was a huge mistake.
As it has become increasingly expensive to run political parties, so politicians have come under pressure from those on whom they increasingly depend for funding to lighten financial regulation.
This pressure to deregulate led to Britain and the US being stripped of essential protection. Gordon Brown admitted laxity during the election campaign when he said in a television interview: “In the 1990s, the banks all came to us and said: ‘We don’t want to be regulated, we want to be free of regulation.’ The truth is that, globally and nationally, we should have been regulating them more.”
New Prime Minister David Cameron pledged: “I want to make sure that my Government always looks after the elderly, the frail, the poorest in our country”. If he is sincere, he must look for sources of revenue that ensures they do.
The banking industry could be an immediate source of revenue. The banks have the resources to clear up the mess they created and they should be forced to use them.
Andy Haldane, the Bank of England director responsible for financial stability, has pointed out that modest reductions in the payments to shareholders and staff made by British banks in the run up to the crisis – lowering dividends by a third and remuneration by as little as 10 per cent – would have more than covered all the capital taxpayers have been forced to provide in order to bail them out.
Moreover, although taxation rates in Britain are low, major companies still devote huge efforts to avoiding tax.
Her Majesty’s Revenue & Customs does not know precisely how much tax companies avoid paying. Its estimates rise as high as
£13.7 billion a year. According to HMRC,
12 of the country’s largest firms “extinguished all liabilities in 2005-2006” through avoidance mechanisms.
Vince Cable has previously been very keen on fair taxation. He proposed a general
anti-avoidance rule tax whereby anything that looked like tax avoidance would be deemed to be so. Before the election he noted: “The evidence of systematic tax avoidance by rich individuals and UK-based companies strikes a particularly ugly note in these straitened times. In the case of the UK-based global banks, we have also painfully discovered that the UK taxpayer has vast exposure as a result of the Government’s role as lender (and, now, investor) of the last resort. To see these catastrophically mismanaged institutions going cap in hand to the Government while simultaneously organising tax avoidance schemes at the expense of the UK taxpayers beggars belief. There is a strong case for a more aggressive approach to tax avoidance.”
Now it seems we may not see one. Yet the great danger of another global crash looms on the horizon unless action is taken to reform the banking and investment system and remove once and for all the perverse incentive to take reckless risk that is the bonus system.
The banks have fed on the millions that have been pumped into the economy and are back to making vast profits and paying huge bonuses. But the threat remains and unless “extreme measures” are not taken there will be another financial catastrophe.
Richard Koo is chief economist of the Nomura Research Institute, the think-tank of the Japanese securities firm, Nomura. He is no radical. He used to be an economist with the Federal Reserve Bank of New York. In his book, The Holy Grail of Macroeconomics – Lessons from Japan’s Great Recession, Koo argues that we should learn from Japan’s mistakes in cutting expenditure severely. He contends it is a disastrous error to cut deficits too soon. If anything, we should be increasing deficits, to create more jobs and get a real recovery going. His message is unlikely to find favour with the Tory-Lib Dem Government in Britain. Our politicians prefer to explain international financial issues in domestic economic terms. This fosters the illusion that common sense household budget considerations should be applied to the management of our complex economy.
By this deception, they aim to create panic support for measures that would devastate the lives of millions of people, while leaving unscathed those who caused the crisis.
There are two sides to any deficit: too much expenditure, but also too little income. The Government is able to marshal public support behind cutting public expenditure, because that’s what most people are now having to do within their personal budgets. But governments aren’t “most people”. They have mechanisms for raising money that are not open to the rest of us. Governments can look at the national pot of money and choose where the pain should fall.
So the solution is clear: tax those who benefited from deregulation and caused the crash, not those people who have already suffered from their greed and will continue to do so for years to come.
