‘To point a finger at “bankers” (whatever the word means) is as dangerous as stigmatising racial or religious minorities’
“Financialisation” is a neologism invented to characterise certain trends on the American economic scene, and so the international economic scene, in the opening years of the 21st century. Would it be fair to propose another neologism, “financialitis”, to describe the inflammation of hostile commentary on capitalist financial institutions and, in particular, on organisations which label themselves “banks”?
Traditionally, British newspapers have been friendly towards these institutions, but recently the Financial Times has positioned itself as a critic of the financial structures found in free-market societies. Its chief economic commentator, Martin Wolf, has written a series of outspoken articles advocating more state intervention and control.
The inability of Northern Rock to fund its balance sheet last summer and the subsequent run on its deposits may have started the latest bout of financialitis in Britain. But the condition has been aggravated by the US Federal Reserve’s decision to extend a loan to Bear Stearns as part of a larger rescue effort, even though Bear Stearns is not, strictly speaking, a deposit-taking bank. Bear Stearns is instead a market-maker and underwriter of securities. These two activities are not only the most distinctive and riskiest in modern capitalism, but are also very highly paid.
Clarity of discussion has not been helped by the tendency of Bear Stearns and similar organisations to call themselves “investment banks” and journalists’ habit of lumping such organisations as “banks” together with Northern Rock. In fact, Northern Rock does not make a market in or underwrite securities, and Bear Stearns does not have depositors or make mortgage loans. They are utterly different businesses. Yet the conjunction of supposed “state aid” for Northern Rock and Bear Stearns with the announcement of immense incomes for certain individuals working in self-styled “banks” has provoked outrage. The punditocracy wants revenge.
Wolf’s article on “Why regulators should intervene in bankers’ pay” in the Financial Times of 16 January contained a striking sentence which seems likely take its place in standard compendia of quotations. Speaking of banking, it remarked, “No industry has a comparable talent for privatising gains and socialising losses.” Wolf’s phrase “socialising losses” was a reference to central banks’ practice of extending loans (so-called “lender of last resort” loans) to commercial banks unable otherwise to finance their assets and, occasionally, to the later incurrence of losses on such loans. Implicitly, the question being raised was whether central banks should make lender-of-last-resort loans at all.
Wolf says the free play of market forces is dangerous because bankers’ bonuses are often based on performance over too short a period: “Individual institutions cannot change their systems of remuneration… without losing talented staff to the competition. So regulators may have to step in.”
Much has gone wrong here. Carelessness in the use of words has led to false reasoning and bad prescriptions. In late 2007 the media routinely talked of the Bank of England’s loan to Northern Rock as “government money”, almost as if civil servants were writing out cheques to cover losses on mortgage loans in just the same way that they write out cheques to pay for hospitals and schools. But a loan from a government-owned bank is not at all the same thing as government expenditure on health and education. It must be serviced by interest payments and eventually repaid. The same is true of all lender-of-last-resort loans. Wolf says “the industry” (whatever that means) is “exceptional in the extent of both regulation and subsidisation”. But — if deposit-taking banks define Wolf’s “industry” and the lender-of-last-resort function is its “subsidisation” — he is simply wrong. If he took the trouble to inspect central banks’ annual reports over many decades, he would find that they have worked out ways — with their two key customers, the government and the commercial banks — to reconcile a lender-of-last-resort role with moderate profitability. Subsidisation has certainly not been the norm.
Secondly, the word “subsidisation” is astonishing in the context of modern British banking and the City. The year 2007 was indeed a difficult one for several large UK banking groups, but it is easy to check (again from annual reports) whether they were net recipients of subsidy or net taxpayers. They all paid tax — lots of it, in fact. Royal Bank of Scotland led the pack with £2,052m, then came Barclays with £1,981m, HBOS £1,365m and Lloyds TSB with £679m. Even Northern Rock paid tax of £31.4m as well as the interest on its lender-of-last-resort loan.
Finally, government regulation over the pay of individuals — individuals who respect the law, pay taxes and honour contracts — is an abomination in a free society. To point a finger at a particular profession (like “bankers”, whatever the word means) is potentially as dangerous as stigmatising racial or religious minorities. The British highbrow press, never slow to lecture others, has gone too far. A more measured and sensible analysis of the financial system’s difficulties is overdue.