Generally, I find myself in disagreement with Jeremy Corbyn’s views as many have no basis in practical reality. But there is an issue on which our opinion aligns – our ‘rigged system’. His perception that rules do not apply equally is correct, even if his subsequent socialist ‘solution’ is not.
Nowhere was this unfairness more evident than in the 2007-2010 taxpayer-funded bailout (subsidy) of our banks which also resulted in many bankers receiving huge bonuses. Both events were direct consequences of the failure of the global financial system. Many other insolvent UK businesses would have – rightly – been allowed to fail, but the banks were allegedly ‘too big’ (read ‘too interconnected’) for this to happen. Perversely, this Government guarantee of bank solvency increases the probability of failure as willing lenders do so cheaply and without restrictions, encouraging greater borrowing and risky high-margin gambling by bankers. Reducing the cost of credit for the big banks is another enormous competition-distorting government subsidy, courtesy of the UK taxpayer who inadvertently helps to fund bankers’ bonuses and encourage short-sighted policy-making.
So why do UK politicians allow this to happen? In short, lobbying by the financial industry. When politicians are democratically accountable to an electorate, the playing field used by both consumers and industry is level. When it is tilted towards industry by lobbying, the result is crony capitalism that stifles economic growth. Powerful financial lobbyists operate at the centre of the second-largest market in the world, comprising 22 per cent of the global economy – the European Union. Of note, 98 per cent of the advisory group of the European Central Bank, which is responsible for banking supervision, represent private institutions. What’s worse, where law is enshrined into a rigid code, as are the rulings of the European Court of Justice, judges have little discretion and strong lobbyists can dictate outcomes. Common law jurisdictions, such as the UK, provide a better defence. However, UK politicians are becoming no more than mere cogs in a larger machine that influences international regulation in its own favour and is accountable only to itself. That this machine is the financial industry should worry all UK businesses: it has the ability to allocate power and profits by influencing entry into markets. If it is unfair, so too will be the rest of the economy.
The interconnectedness of the financial sector throughout the EU confers the ability to drain deposits from the UK to other countries within the Union. This enables banks to extend their power throughout the entire EU market, all the while backed by subsidies from the UK taxpayer. Indeed, it was the fear of the power of the New York banks over the rest of the USA that in 1933 led to implementation of many restrictions, including limiting interstate branching, i.e. preventing New York banks from opening branches in other states. Although potentially misguided economically from a banking perspective (they distorted allocation of funds and hindered expansion), these restrictions splintered the banking sector and reduced its political power, allowing a vibrant securities market to drive more efficient capital allocation and real economic growth.
Corbyn’s socialist nationalisation ‘solution’ to the present crony capitalism is to eliminate all competition and transfer political power from the hands of a small financial elite to his political one: an extrapolated version of our current situation, hardly a utopia. There is another way. A ‘no deal’ Brexit may well have the same effect as the 1933 US regulations with respect to the EU. It is hardly surprising that the financial sector is concerned and the fickle financial markets could react accordingly. The industry’s political influence will be lessened and it will be forced to adapt its business model to fend for itself and compete internally, rather than suckling on the breast of its adopted parent governments. But an independent competitive banking system and public capital markets will better ensure capital flows widely and efficiently to promising UK businesses, promoting innovation, productivity and a more democratic capitalism.
So, Mr Carney, continue to capitalise our banks and ensure enough liquidity to withstand any Brexit shock. Do so in full knowledge that you are working within the mandate to bring democratic accountability back to capitalism and are shifting the balance of political power back where it belongs: in the hands of the many, not the few.