Five years of crisis: little learning, continuing risks

27 September 2013
Article

Why has there been so little progress or learning from the world's biggest financial crisis? What solutions could really put people back in charge of finance?

15 September 2013 marked the 5th anniversary of the collapse of Lehman Brothers seen as the beginning of the world's biggest financial crisis. One could reasonably expect by now that governments would have enacted some significant reforms to stop it ever happening again. Instead for the financial sector it is as if the crisis never happened.

Some banks, such as Bank of America and JP Morgan Chase, that were too big to fail have actually become bigger and more interconnected. They have also become too big to save (with less bail out money in government coffers) and too big to jail, as governments fail to heavily fine or sanction them for fear that they could collapse. None of the culprits of the crisis have been put in prison and no law is making the culprits of any future crisis liable for their deeds.

The financial system continues to be riddled with risk and instability. New banking rules still allow banks to borrow 33 times their capital, compared to 4 four times for a normal company or a US bank 130 years ago. Speculative, risky, complex derivatives trading, whose collapse at Lehman Brothers unleashed the financial crisis, continues unabashed. The non-transparent ‘over-the-counter’ derivatives have grown 8% from US$ 585.9 trillion in December 2007 to US$632.6 trillion in December 2012.

The few financial reforms and banking rules enacted have not eliminated the risk. In the case of derivatives, for example the risks have been centralised due to the establishment of a few ‘centrally cleared parties’ (CCPs), which act as an insurance against defaulting derivatives contracts. However, there is no solution should these CCPs collapse in times of crisis (and billions of dollars need to be paid out).

Meanwhile, any new banking rules have moved a lot of lending and financial services to the ‘shadow banking’ sector that comprises non-bank companies such as hedge funds and ‘money market funds’. This sector grew to US$ 67 trillion from US$ 59 trillion in 2008 and is not yet supervised let alone regulated. Proposals to manage this sector are only now emerging.

No fundamental reforms

In several key ways, little has been learnt in the last five years. The constant series of painstaking meetings to discuss reforms of the sector at countless expensive EU summits have led to halfway, weak results that only tinker at the edges of the problem. They also completely fail to see the links between the financial crises and other crises such as social inequality and climate change. There has been no questioning of neoliberalism, let alone capitalism and no vision of alternatives.

The reform process does not include one rule that would require lending and financial services to invest in the transition to a socially and environmentally sustainable society and economy.

Instead EU’s decision makers in their neo-liberal ivory tower have reverted to austerity (including privatization), a clamping down on democratic decision making over budgets (e.g. on spending for public services), and expansion of financial involvement in new areas of society including the environment proposals for new market mechanisms around climate, biodiversity etc.

How the financial sector keeps society hostage

The lack of real reforms and alternatives shows that the financial sector has succeeded in grabbing political power across Europe and is holding whole societies hostage. All parts of the financial sector, and certainly not only banks, have become masters at lobbying to deregulate or to weaken reforms. Regulators and supervisors continue to listen primarily to financial lobbyists, and rarely balance those views with those from academics, workers, consumers, citizens, social movements and NGOs. The financial sector constantly argues that EU financial services will lose out if too stringent rules are made, which finds a listening ear with neo-liberal regulators. If political decision-makers do not listen and actually try to regulate, the financial industry takes them to court using old laws to refute new legislation.

In other areas of EU decision-making, there isn't even the pretense. Former and currently negotiated free trade and investment agreements continue to contain pre-crisis rules that “discipline” governments for regulation!

The financial sector works hard to keep the issues complex, which is used to blackmail regulators and deter public scrutiny and intervention. An over-complex financial system that breeds crises is answered with more complexity rather than a radical demand for simple understandable and controllable finance.

There are alternatives

There are plenty of alternatives proposed by civil society and academics that could prevent future crises and build the society we want, but which are not, or hardly, discussed by regulators! This includes:

  • Limiting the size of banks so no bank is too big that its bankruptcy threatens the financial system
  • Legally recognising financial stability as a public good
  • Taking banks off the stock exchange, as this drives banks to take excessive risks in order to make huge profits; and allow only highly regulated and democratically controlled institutions to be involved in lending
  • Requiring banks to increase their capital reserves Limiting banks’ profit-making and salaries/bonuses (note: net income of JP Morgan Chase was US$ 21.3 bn in 2012 !)
  • Legally prohibiting speculation by 'markets', such as against the Euro
  • Ending provision of cheap money by Central Banks to commercial banks without regulations and conditions (including bans on speculation and risky lending)
  • Introducing capital controls (which even the IMF agrees could have helped Greece and Spain)
  • Ending austerity measures and raising revenue by prohibiting the use of tax havens and imposing a strong Financial Transaction Tax (current EU initiatives are already threatened by industry lobbing)
  • Banning risky financial products and players (such as Hedge Funds) that spread risks throughout the system, and other speculative and socially useless instruments, e.g. for food price speculation

The current banking structure needs to be replaced by a diversity of banks, with a focus on cooperative banks, ethical banks, banks with unlimited liability partnerships (i.e. managers and owners are sanctionable for micro and macro crises), regional / local banks, etc.

Regulators, supervisors, the financial sector and the public are far from understanding let alone implementing the lessons of the 2008 financial crisis. There is still a huge task for social movements. Some continue to call for more radical reforms (see http://corporateeurope.org/financial-lobby/2013/09/anniversary-broken-promises) and Finance Watch (see http://www.finance-watch.org/hot-topics/campaign-change-finance/). Others are mobilising at grass roots level, especially in crisis struck countries, and new efforts are being made to bring them together to put a halt to the neo-liberal reforms that do little to protect citizens from the power grab of the financial sector.

photo by Thierry Ehrmann