There was a strained moment at last night’s dinner at the National Liberal Club for the London Liberal Democrats, when the party was challenged by a member over the Occupy protests at the City of London. Both the guest speaker, Paddy Ashdown, and the Mayoral candidate, Brian Paddick, said that the act of protesting was a wonderful, liberal thing to do, and that the party should engage with the protesters (and indeed has), but that there was too little in the way of constructive proposals for the party to take on. Given that the anger that drives the protests is shared widely across the population, this seems a rather inadequate response. But politicians of all stripes struggle to say much more.
The Labour leader, Ed Miliband, has tried to ride the bandwagon. It chimes well with his appeal for greater morality in commercial life. This line seems to play quite well with policy wonks and political professionals, but just seems to underline Mr Miliband’s lack of grounding in the gritty “real” world – a lack which, of course, he shares with most politicians of all parties. His ideas share with David Cameron’s “Big Society” a complete inadequacy when faced with the big issues highlighted by the protesters.
It is easy enough to accept the core of what the protests are about. There has been a lot of irresponsible behaviour in world finance which has helped bring about the current economic crisis; these financiers still seem to be attracting outrageous levels of pay; and taxpayers still underwrite the whole show. After this, however, practical politicians have to deal with four difficult facts in the search for policies.
First: world finance may have failed, but capitalism hasn’t. To many of the protesters world finance is simply the purest form of capitalism and its failure represents the failure of the whole capitalist system. Well greed and profit seeking, familiar parts of the capitalist way, had a lot to do with it – but as much of the problem was uncapitalist politics. Governments borrowing too much money to develop public services; interfering with the market to extend home ownership (especially in the US); China’s distinctly uncapitalist but de-stabilising trade policies, to name but three factors. The real problem was politicians trying to tilt capitalism to their own ends, even if these ends were quite laudable. There is in fact no substitute for capitalism if we are to maintain the living standards in the developed world, and to roll back poverty in the devloping world. Interfering with the workings of free markets is likely to make matters worse, not better.
Mention of politicians brings in the second awkward fact. The public (especially in the developed world) is at least as much to blame for the economic crisis as the bankers. Excessive borrowing was widespread, as was pressure on politicians to ride the boom and expand government. It wasn’t only the bankers that were being greedy. It is natural enough to blame the bankers, saying like children, “It wasn’t my fault, he made me do it!” – but this isn’t very helpful in the search for solutions.
And a third awkward fact is that banking and finance, apart from the greed and the excess, carry out a vital world function. The process of linking savers to borrowers, which is essentially what finance does, is vital for economies to develop and poverty to be fought. It is absolutely no coincidence that the growth in world finance in the last couple of decades happened at the same time as the biggest progress against world poverty that we have ever seen. And the beneficial effects of world trade that finance facilitated completely dwarf the well well-intentioned works of government aid and charities. The problem is that the bankers simply creamed off too much of the benefit for themselves.
Which leads naturally to the fourth, and awkwardest fact of all: the bankers are holding a lot of hostages. We need bank lending to keep productive industries going. Governments needs finance to keep public services going. In the UK, and especially London, world finance includes many perfectly productive jobs which we can ill afford to lose. Vindictive policies will hurt us all.
But finance does need to be tamed. But doing so is a slow process which requires a great deal of patience. There are two key sets of reforms, neither of which are quick:
- Separate investment banking from utility banking. There are many abuses in utility banking, but the really dangerous stuff is in investment banking, and allowing investment bankers to run utility banks is a recipe for total disaster. The Vickers Commission’s reforms are an excellent start here – and seem to be leading the way globally. The investment bankers are patiently trying to undermine them – but politicians and the public need to stay on their case.
- Make investment banking much less profitable. It is the profits that drive the excessive pay – and policy needs to focus on the causes of the disease rather than wasting time on the symptoms. There are two main causes of excess profits: lack of competition and the failure of organisations to bear public costs (for example of the public’s underwriting of the banking system). In investment banking, it is the second of these that is the most important (in retail banking it is the first…), and the most effective way forward is raising capital requirements. This is being done, and banking profits are duly under a lot of pressure. At first it will be the shareholders who feel the pain – but in due course it will be bankers pay, as shareholders get fed up with their overpaid servants.
Actually progress is rather good. We don’t need gimmicks like the “Tobin Tax”. we need vigilance and patience. I am proud of the way the Liberal Democrat ministers have been keeping the pressure up (Vince Cable is the star, but Nick Clegg is clearly on side). The bankers are waiting for the Occupy bandwagon to move on. It will, but I hope and trust that the Liberal Democrats will still be on their case.