All praise to Lord Turner, the chairman of the Financial Services Authority, who admitted last week that much of what happens in the City is “socially useless”. Lord Turner of Ecchinswell makes an unlikely anti-capitalist; he’s a former vice chairman of the investment bank Merrill Lynch. But it takes one to know one, I suppose.
His call in Prospect magazine for a reduction in the size of the financial sector, and for steps to eliminate high risk practices, are radical and right. If capitalism is to be saved from itself, it should listen - not that it is. Lord Turner has been kicked all round the City by angry bankers and politicians. The Lord Mayor of London, Boris Johnson, said he was “crackers” for risking the City of London’s standing as Europe’s leading financial centre. The Association of British Insurers described his remarks as “Marxist”, and Angla Knight of the British Bankers Association, interviewed on BBC, refused to believe he’d actually said what he said. “It’s a race to who will sack him first” said one City figure.
So, what are they so upset about? Well, first of all Lord Turner said that a lot of the speculative activity that banks engage in has no real utility - it doesn’t benefit society or promote investment and economic development. Banks made very large sums of money during the boom years by developing highly sophisticated instruments designed almost entirely for speculation, for betting - like Credit Default Swaps. Now, insurance, everyone needs, but we don’t need a $50 trillion market in CDSs which has grown from zero in less than a decade. We all need mortgages - or most of us do - but we don’t need Collateralised Debt Obligations, insanely complex securities whose ultimate value depends pools of sub prime mortgages in America.
In fact, we could do without a lot of the financial products that have been created by our financial services industry over the last thirty years. With profits insurance policies that don’t deliver any profits. Endowment mortgages that not only fail to deliver any bonus payments after thirty years of saving but can’t even meet the original mortgage loan. I’ve contribute to personal pensions most of my adult life and, like most people, would’ve been better leaving it in a building society. Then there are all the other scams and devices developed to promote the debt society. Credit cards with low minimum repayments which ensnare people in huge debt because they don’t realise that they are paying 27% interest rates. Payment Protection Insurance, which is a plain rip off. Precipice bonds, split capital trusts, buy-to-let mortgages based on phoney valuations. 125% mortgages that put people in negative equity even before they cross the threshold. Equity release schemes that con older people into giving up the value of their homes. Those evil Christmas saving clubs which dump the risk on the saver when anything goes wrong.
Okay, I’m going a little wide of what Lord Turner was actually targeting which was complex derivative trading. But a great deal of what goes on in financial services is not only socially useless, but economically damaging. Selling people financial products that deliver poor investment returns, because the profits are creamed off in high commission charges, may benefit financial advisers and banks, but it doesn’t help the economy because it makes people averse to saving. One of the chief causes of the financial crisis was the absence of a savings culture and the increase in personal debt. But if people have no confidence in the savings vehicles, how can they be expected to save? Pensions have such an appalling reputation, that most people refuse to have anything to do with them, leaving millions with the prospect of a miserable old age, and the state with the burden of looking after them.
It is important to bear this in mind when we hear City spokespeople bang on about how much the financial services sector contributes to the economy. It is the second largest source of GDP after manufacturing and provides 40% of all corporation tax. The government loves the City precisely because it has delivered a great deal of tax revenue in the past. But if this revenue is based on financially inefficient or positively fraudulent financial products, then the benefit is illusory. The losses elsewhere in the system will cancel out any tax gain. Finance is not like manufacturing. It does not make products that add value and are traded as commodities. At best it provides a service, but if the services damage peoples’ wealth then they should be stamped out.
We need nothing less than a reformation of our entire financial system, starting at the top, with the mega-banks and their leverage and speculative trades, and working down to the level of the financial advisers. Modern life requires all adults to enter into complex and sometimes frightening debt obligations and investments, like mortgages and pensions, where the saver is expected to take on almost all the financial risk. We don’t deal on equal terms with the providers of these financial products because we are not experts and they are. People are expected to take long term bets on where the stock market will be in thirty years time while handing their savings over to financial institutions that use them for speculation in the meantime.
This really won’t do any more. Nor will allowing more and more of the wealth of society to be channelled to the rich through the intermediation of the financial system. We have an economy which is based on huge income and wealth disparities. But as John Maynard Keynes noted sixty years ago, when more wealth goes to the rich, less and less of it is devoted to consumption. The rich don’t buy more things, they start investing in assets, which inflate in value. That ultimately that led to the Wall St Crash and he Great Depression.
In Britain and America, there has been a similar decline in consumer spending power in the last ten years which was masked by rising house prices. People were able to continue spending because they borrowed more and more against the value of their houses. This was unsustainable. Eventually, the system blew up. But the fundamental problem of deficient demand in the economy remains.
This is why Lord Turner’s call for a tax on international financial transactions could save the financial system. A "Tobin" tax, so called after the US economist, James Tobin, would the steam out of speculation, but more importantly it would also help to distribute bank profits to the poor and to “public goods” like combating climate change and away from speculation. We’re told that Lord Turner is for the chop for speaking out. More fool them. He could be their only hope.