The dialogue of the blind

In his response to the Government’s Comprehensive Spending Review on Wednesday, the Shadow Chancellor Alan Johnson made a very sobering observation.  “If countries around the world hadn’t run up debts to sustain their economies,” he said, “people would not have lost their credit cards, they’d have lost their houses, their savings and their jobs.“

Very true.  But the remark, apparently designed to console us about the size of our own national deficit, is actually far from reassuring.  If we look below the surface, we find out that what it really means is that the macro-economic system within which we live, and on which our prosperity and lifestyles depend, is built on nothing more than hot air. The efficient functioning of our international financial markets, our national economies, our businesses, and our individual lives depends on massive quantities of debt leveraged to outrageous proportions, and far in excess of any concrete foundation in productivity, trade, land use or other tangible activity.

 By 2007, according to the international credit rating agency, McKinsey & Company, the total value of global financial assets reached a peak of $194 trillion, a sum equal to 343 percent of global GDP. In other words, most of our so-called global growth has come from the rapid expansion of debt - and now the chickens, unsurprisingly, have come home to roost.  To quote McKinsey again,  ‘the recent bursting of the great global credit bubble not only led to the first worldwide recession since the 1930s but also left an enormous burden of debt that now weighs on the prospects for recovery. Today, government and business leaders are facing the twin questions of how to prevent similar crises in the future and how to guide their economies through the looming and lengthy process of debt reduction, or deleveraging.’

Quite so.  In the UK alone, public sector support for the banking sector amounts to at least £1.2 trillion committed, equivalent to 85% of GDP.  As we can see from the  measures taken in the spending review, this support is now being paid for by the citizens of the country, and will adversely affect the well-being of virtually all of them, most particularly that of  the poor. But the answer to preventing similar crises in the future does not lie in shoring up the present system by pouring resources into organisations that have burnt their fingers in the huge casino of the global financial markets. Rather, in the short and medium term, it must lie in radically reforming and regulating the banking system, and in the long term – and absolutely crucially – in restraining and regulating the global financial system itself.

The total dominance of the world economy by these markets lies at the root of the system’s instability.  The term covers various sub- divisions, including the money, credit, capital and equity markets, and within them most transactions take the form of highly volatile stocks and bonds, investments and short-term loans. Their operations are essentially speculative in nature, and employ a large range of instruments of a very opaque and complex kind. Their turnover is vast, dwarfing the productive economy. To give just one example, global currency trading market alone is worth £250 trillion per annum, fifty times greater than the total value of all the goods and services traded globally each year. Profits can be huge and losses frequently catastrophic and banks investing in, or lending to finance these unproductive and high-risk deals  are inevitably deeply vulnerable. Unless this practice is seriously addressed, the present banking crisis will certainly not be the last.

At the moment, regulation of this whole system is woefully inadequate. With regard to the banks in particular, the set of international rules emerging from the recent Basel 3 negotiations, which are designed to control the capital and liquidity buffers held by banks in the wake of the crash, fall far below the level of control needed.  Indeed, their minimum level of 7% for banks' Tier 1 capital ratios (the most commonly used measure of balance sheet strength) has done almost nothing to change the situation. UK banks have emerged relatively unscathed largely because they raised so much capital in 2009 after state bailouts and aid. In fact, many of them are already set to exceed the stipulations of the new rules; for example estimates give Barclays on 8.7%, RBS 9.4%, Lloyds 10.8%, HSBC 11.9% and Standard Chartered on 9.9% by 2012. They will therefore be able to continue their activities on the financial markets much as before.

The fallout from the Government’s spending review should show us all too plainly how much our individual lives are affected by the operations of this enormous, unproductive and virtually unregulated financial system. If we are to avoid a repetition of the recent crash, we must call for a radical overhaul of the framework within which it operates. However daunting such course may seem, this is not an impossible demand. And unless it is made and addressed, ordinary citizens will continue to pay a very high price for the excesses of the financial sector.