Roll the bones
President Obama recently proposed a major reform of the financial sector, whereby banks would not be allowed to trade on their own account (nostro) in most financial markets, nor would they be allowed to own hedge funds. In essence, what Obama is proposing is that banks neither own hedge funds – because then, if the funds’ speculations go wrong and they ‘blow up’, as two Bear Stearns funds did in July 2007, thereby setting the snowball in motion – nor behave as if they were hedge funds themselves.
The response from the banking sector and its army of lobbyists has, predictably, been one of strong but muted opposition. Strong, because this is the death-knell for bloated bank profits, bloated bankers compensation and bloated banks, period. Muted, because public opinion is now running so strongly against banks and bankers that speaking out too loudly could easily trigger a riot and physical violence against leading bankers and their swank homes. It has already happened in the UK and it could easily happen in the US as well.
The right-wing media, from the rational Wall Street Journal out to the raving blogs that make Rush Limbaugh sound like a closet Maoist, are having a great time hammering Obama – who is, as they well know, a socialist subversive (that’s on the days he’s not an Islamist terrorist). But on this issue, the policy that Obama was voicing was structured by Paul Volcker, the former Chairman of the Federal Reserve and a figure above the political fray and beyond suspicion for either socialist tendencies or general anti-American activities.
In fact, although the populist onslaught accompanying the latest proposals is distasteful to say the least, it couldn’t happen to a less-pitiable bunch of people. That’s why the media reports in recent weeks of an ‘exodus’ of bankers, who are quitting banks to work for hedge funds is not only no cause for alarm, but actually cause for rejoicing. These are people who by temperament and training need and want to be traders in the markets, taking big risks, making big bets and usually, in fairness to them, ready to die by the sword as they live by it.
The natural milieu of such people is overtly risk-taking entities such as hedge funds. They have no business working in and for banks – and banks have no business employing them. Even before Nick Leeson single-handedly gutted the 200-year-old Barings Bank in 1995, it was clear that a single ‘rogue trader’ could, whether by accident, design or sheer stupidity, bring down an entire institution. Therefore the chief rogues in these scandals are the people who hired the traders, in the hope of getting a cut of the winnings that successful gambling would accrue.
In fact, it is a telling sign of how deeply the madness of market-worship has permeated the financial system, that a proposal to restore basic sanity to the banking sector, by forcing the banks to go cold turkey on the drug of trading profits, can be criticised as an attack on capitalism, freedom and the American way of life. Not that many years ago, portraying the business of gambling with other people’s money as ‘the American way of life’ would have been so weird as to be laughable – but no longer.
Even if we take a neutral position on financial speculation per se – there are libraries of learned analyses arguing whether speculative activity contributes much or anything to overall economic welfare, as distinct from the welbeing of financial institutions, their employees and shareholders – it seems a no-brainer to support the ‘Glass-Steagal’ approach that creates a barrier between commercial banks and investment banks.
Commercial banks take deposits from the public and loan those funds to businesses and households. They also run the payments systems – the financial ‘plumbing’ without which modern economies are unable to function at all. And they finance and facilitate the conduct of international trade. That is why they are too important to allow a systemic crisis to destroy or neutralise them. But if you let them speculate on the markets, and especially if you let them borrow twenty, thirty or forty dollars of other people’s money for each dollar of their own that they speculate with, then a systemic crisis is inevitable. Only the ‘when’ is unknown, not the ‘if’.
Banking needs to be made as boring and straightforward as possible. Even then, lending money will remain a risky business, but at least bankers can be trained – and incentivized – to reduce risk levels and avoid excessive risk. But ‘investment banking’ is based on playing with excessive risk. The two areas have as much in common as a blood bank and the postal bank. The vision of the ‘financial supermarket’, a massive institution encompassing every kind of financial firm from insurance companies to commodity traders, was born in the age of deregulation and died in the crash of 2008 – a victim of its own boundless ambition and the psychological and organisational incompatibility of its constituent components.
Because the banks are so critical to the functioning of the overall economy, they must and always will have explicit or implicit government support. That’s why the casino departments have to be expunged from the banks, along with the croupiers, professional gamblers and the rest. Let ’em roll the bones somewhere else, using their own money and not that of the unsuspecting general public.