Industry | 2009.09.05
This unexpected radical shows up an abject failure to tame the banks | Aditya Chakrabortty
It has taken the top City regulator – and an ex-banker to boot – to show any real steel in the drive for financial reform
He said what ? To get some idea of just how radical yesterday\'s comments from Adair Turner are, consider this: the chairman of the City\'s top watchdog has just gone on record as saying that the financial services industry is too big, and that some of what it does is " socially useless ". He even concedes that a tax on financial transactions – what\'s called a Tobin tax after the economist who came up with the idea in the 1970s – may be a good idea. For most of the past three decades the most vocal supporters of a Tobin tax have been either development pressure groups or French Trotskyists. But Lord Turner is neither French nor some hardboiled Trot entryist: he\'s an ex-McKinsey consultant and former vice-chairman of US bank Merrill Lynch turned financial regulator. True, he is a far more interesting thinker than that CV might lead you to believe – he\'s also written about how there should be more to running an economy than simply stoking GDP growth and much else that would go down well with a Climate Camper – but the point remains: as radicals go, Turner is not your usual suspect.
Nor is he a Labour minister. We\'ll come back to Turner\'s diagnosis in a moment, but it\'s worth remarking that in this debate over financial regulation the people making the running do not hail from Westminster. Instead you have Adair Turner, and Mervyn King doing his best Victorian headmaster act and warning of feckless bankers overpaying themselves. Meanwhile, the politicians – the group that should be the shock conductors for popular anger over the bailouts and bonuses – are (not withstanding now-mandatory name checks such as the Lib Dems\' Vince Cable) running up the white flags.
The first chapter of Alistair Darling\'s July white paper on banking reform was devoted to explaining just how important the City is to the UK economy. The Treasury\'s ledger of revenues from financial services did not include a debit column that listed the amount lost on institutional bailouts and tax avoidance – of course it didn\'t. Put to one side, if you can, the watchdogs\' manifold failings in the run-up to the banking crisis. In the debate over reforming the City there has been none of the regulatory capture that economists usually fret about – where the regulators forget about the public interest, and rig the rules to suit the very sector they\'re meant to be supervising. There is, however, plenty of evidence of political capture. This isn\'t just a New Labour problem; it applies also to David Cameron and George Osborne, whose policies are nowhere near as tough as their rhetoric – and to Barack Obama\'s administration, which, on everything from regulating bonuses to handing out taxpayer money, appears to have turned into an unglamorous subsidiary of Goldman Sachs. A cast like this means the prospects for real reform at next month\'s G20 summit of major economies in Pittsburgh are depressingly slim.
Reading through Turner\'s comments to Prospect magazine, what leaps out is how he employs a breadth of analysis one would normally expect from politicians. Yes, the regulator-speak about capital requirements is all present and correct – but there is also an express anxiety about the dominance of wholesale financial services in the UK economy, and about how many "highly intelligent people from our best universities" are sucked into creating derivatives and other such life-affirming activities.
In other words, the UK suffers from what economists call Dutch disease – where one sector crowds out others. First used in the Netherlands, where the discovery of giant natural gas fields stunted the growth of the country\'s manufacturing base, the term applies equally well to credit-crunch Britain. Consider the loss of more than a million manufacturing jobs since Labour came to power in 1997, partly thanks to the strong pound demanded by the City. Consider too these statistics from Oxford University: last year, even while the banking crisis was at its height, one in five Oxford graduates went into the City. Of all jobs taken up by students, the second-most popular category was "finance and investment analysts/advisers". Finally, consider the comment from Jonathan Black, head of the careers service that, even before the engineering graduates are tapped up by manufacturing firms, "most of the cream have been picked off by the management consultancies". What was it Peter Mandelson said about shifting from financial engineering to real engineering?
A proportion of the best and brightest have long gone off to the City – but never in these volumes. Former City boy Philip Augar went from Cambridge into investment banking in the 1980s and notes that when he went back to his old university on recruiting trips at the start of this decade, the room was "mobbed" with bright young things. "If I\'d been competing for a job against that lot, I\'d never have stood a chance."
Not that you can necessarily blame them, given the financial rewards on offer. Which brings us back to the Tobin tax, cast out casually by Turner. Unlike forcing banks to keep more aside for rainy days or limiting how much financiers can borrow, the Tobin tax is not aimed at making individual institutions less risky in their own best interests. James Tobin described the purpose of his tax on currency exchanges as being to throw some sand into the wheels of finance. In other words, he didn\'t want to help bankers – he wanted to constrain them. In regulatory terms, this isn\'t like forcing car manufacturers to install seat belts and air bags (which is where the discussion of supervising banks has stalled), it\'s a lower speed limit, safer for pedestrians but annoying to boy racers.
The radicalism of the Tobin tax is one reason why it\'s never got off the ground – that and the fact it would need all the major financial centres to sign up. After more than 30 years on the shelf, it now appears dusty; the problem in wholesale finance is no longer just hot money flooding in and out of countries. The question is why the left has struggled to come up with solutions to cut banks down to a more appropriate size.
The high pay commission backed in these pages by Vince Cable and Polly Toynbee is a case of right objective, wrong tactics. An external body setting limits to pay is clunky. Why not work with the grain of how public companies operate and push for more workers to sit on their firms\' boards?
More generally, what\'s needed is greater awareness of the complexity of global financial markets – and more confidence in articulating the uselessness of some of their innovations. What is the point of trading insurance – credit default swaps – against a default by the US government? Should Uncle Sam ever go bust, what traders will need is not insurance but a cave piled high with tinned meat. So a form of licensing for new financial products would be a good idea. Rather than grump about bankers\' bonuses, far better to have more tax on banks\' residual income (the funds out of which bonuses are paid). And of course, splitting financial institutions between their utility functions – co-ordinating payments – and their casino operations should be a given. The bankers will threaten to go elsewhere but the rest of us can with stony faces respond that we don\'t need all their services. And they shouldn\'t take our word for it – just talk to the guy who regulates them.
For more information, please visit
http://www.guardian.co.uk/commentisfree/[...]rner-banks-tax-regulation-city
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