Democratise companies to rein in excessive banker bonuses

Prem Sikka

In times of austerity, one of few things that seems to be booming is the trade in wheelbarrows. At least, company directors at major corporations will need them to collect vast amounts of remuneration they continue to award themselves, with the help of ineffective remuneration committees.

The financial dealers on Wall Street have collected about US$26.7 billion in bonus payments, the equivalent of a year’s pay for the 1.1m workers on the minimum wage. The UK is not far behind. Bonuses in the City of London have increased by 49% compared to 2012, a higher figure than for Wall Street.

The chief executive of the crisis-ridden Cooperative Bank, Euan Sutherland, was to receive a remuneration package of £3.5 million, but has since resigned. The state-owned Royal Bank of Scotland declared a loss of about £8 billion, but has given 11 directors a bonus package worth about £18.25m between them. At Barclays and Lloyds Bank, the chief executives could be collecting more than £7m each. Of course, wheelbarrows come in handy at other corporate boardrooms too. Despite the costs arising from the Deepwater Horizon disaster, the pay packet of the BP chief executive has tripled to US$8.7m (£5.2m).

The corporate boardrooms are addicted to bonuses, but are the bonuses justified? The claims for bonuses and excessive rewards presuppose that executives exert superhuman efforts to generate wealth. The anatomy of corporate decisions does not really support that. When a new executive arrives at an organisation, for some time s/he is likely to be managing and living off products, services and strategies already in place. So the claims of distinctive contribution are hard to sustain.

Now suppose an executive decides to launch a new product or a project; this will always take some time to develop, plan and launch. The same applies if the mission is to rescue an ailing business. The success or failure of the new projects will not be known for many months or years. Meanwhile, the company will probably incur upfront costs, with no guarantee that the outlays will be recouped. Even after the initial celebrations, the product/service may turn out to be a failure and become a costly burden, as evidenced by payment protection insurance and other financial scandals.

Even if new ventures are successful, the success will depend on the involvement of other employees. It is hard to relate the success of anything to the efforts of few superstar executives. If the success cannot easily be related to the input of one person then the idea of performance-related pay becomes highly problematic. This suggests that higher rewards are claimed simply because some individuals or groups have sufficient power and control to give themselves disproportionate rewards.

So the question then is how to control the institutionalised fat-cattery. The UK government’s preferred solution is to empower shareholders by giving them a binding vote on executive remuneration. Such a step assumes that shareholders are owners of companies and bear most of the risks, and will somehow act in the interests of broader society. The evidence for this is not persuasive.

Shareholders in UK banks have average shareholding duration of about three months. Their position is no different from that of a speculator or a trader seeking short-term gains. They don’t have strong incentives to constrain directors. The UK Parliamentary Commission on Banking Standards looked at the operations of HBOS and concluded that shareholders did not exert “the effective pressure that might have acted as a constraint upon the flawed strategy of the bank”.

The commission also noted that “shareholders failed to control risk-taking in banks, and indeed were criticising some for excessive conservatism”. Shareholders often profit from harmful practices without any personal responsibility. A company can be mandated to sell harmful products, for example, cigarettes. Shareholders can share the resulting profits, but are not personally liable for because they are shielded by the doctrine of limited liability. Thus shareholder irresponsibility is written into the system and they don’t have strong incentives to consider the social good.

Besides, shareholders don’t provide most of the risk capital either. At major UK banks, shareholders only provide between 4.22% and 7.24% of total capital. The rest is provided by savers and creditors. Therefore, it is hard to make a good case for shareholder supremacy.

The proper approach is to empower the public. In the case of banks; employees, savers and borrowers are a good proxy for the public at large. They should appoint directors and vote on their remuneration. Elsewhere, employees, consumers and suppliers could be mobilised to invigilate directors as they all have a long-term interest in the welfare of the company. In a democratised company, directors are unlikely to get high remuneration without paying attention to the interests of employees and other stakeholders.

• This article first appeared on The Conversation website

The Banking Reform Act is rearranging the deck chairs on the neoliberal Titanic

 
Prem Sikka

A new report from the Centre for Labour and Social Studies highlights the failure of the Banking Reform Act to deal with any of the problems at the core of the 2007/8 collapse. Here, its author explains what's really going on.

Some six years after the banking crash, the UK has wheeled out its answer – the Banking Reform Act. Some deckchairs have been rearranged, but little attention has been paid to the key drivers of the crisis.

The biggest financial crisis has coincided with the rise of neoliberalism, which emphasised faith in free markets and light-touch regulation. The notion of competition is a key concept and is applied to every sector of society, including corporations, regions, government departments, hospitals, and universities because this somehow secures efficient allocation of resources and opens the door to wealth and riches. Neoliberalism provides everyday understandings of what it means to be successful. It reconstructs individuals as competitive beings engaged in the endless pursuit of private wealth and consumption. In common with other sectors of society, individuals are expected to have strategies for meeting performance targets and be rewarded accordingly. Thus, performance related pay for executives has become endemic. A necessary condition for the operation of markets and pursuit of self-interest is that all individuals, including business enterprises, need to be constrained by social norms and regulatory structures. But this has not been high on the neoliberal agenda because the state is bad and inefficient and has to be rolled-back, and the self-correcting markets would restore some mythical equilibrium. Well, it has not turned out that way.

The fault lines of neoliberalism have long been evident. The mid-1970s secondary banking crash highlighted empires built on fraud. The state dutifully bailed out banks, property and insurance companies. In 1984, Johnson Matthey Bank collapsed under the weight of fraud and the Bank of England organised a rescue. In 1995, Barings Bank collapsed due to fraud. The twentieth century’s biggest banking frauds took place at the Bank of Credit and Commerce International (BCCI). In July 1991, the Bank of England closed BCCI. Some 1.4 million depositors lost some part of their savings. In an environment of weak regulation, banks continued to pick customers’ pockets by selling useless, pensions, mortgages and saving schemes.

Neoliberalism, remained the key philosophy for governments. The 2008 banking crash showed that banks made vast amount of money from running illegal cartels, money laundering, insider trading, tax dodges, manipulation of interest rates, selling abusive products, misleading investors and consumers. Markets celebrated higher corporate profits and did not ask any questions about the quality of profits, or the social consequences of banking practices. Bank executives collected vast sums of money from performance related contracts.

Markets did not come forward to rescue banks. It was the state, which has been restructured rather than rolled-back, which bailed out banks. Under the weight of neoliberal ideologies it is now less concerned about the redistribution of income and wealth, labour rights, or the provision of decent healthcare, education, pensions and social infrastructure. It has shunned any attempt to democratise corporations or enhance their public accountability. Its major purpose is now to guarantee corporate profits and socialise losses, a kind of reverse socialism has been institutionalised.

The UK state has committed some £976 billion of loans and guarantees support distressed banks and also handed over another £375 billion under its quantitative easing programme. During the boom years of 2002 to 2007, the financial sector paid £203 billion in UK corporation tax, national insurance, VAT, payroll taxes, stamp duty and insurance taxes. Between 1991 and 2007, it created around 35,000 additional jobs. But it received vast stacks of money in return. Confidence in the banking sector is maintained through the provision of a taxpayer funded depositor protection scheme which safeguards savings of individuals of up to £85,000. Since March 2009, the state has maintained interest rates at 0.5%, considerably below the rate of inflation. This has robbed pensioners and savers of income and also eroded the real value of savings. The policy has enabled banks to borrow at ultra-cheap rates, lend at high rates, make profits and replenish their balance sheets. The customer base for banks has swelled as the government has persuaded pensioners and social security claimants to receive their payments through bank accounts rather than through the Post Office. The Private Finance Initiative has been a bonanza for banks and other corporations. In 2012, there were over 700 contracts with a capital value of £54.7 billion. The government is committed to repaying£301 billion over the next 25-30 years, a profit of nearly £247 billion.

The Banking Reform Act does not check fat-cattery or speculative practices. The sunlight of democracy and public accountability is an effective antidote to shady practices, but is missing from the Act as it does not connect with neoliberal values. The Act should have separated speculative banking from the rest. To prevent speculators from contaminating the economy, the privilege of limited liability should have been withdrawn from all gambling. Instead of banking elites regulating the banks for the benefit of the industry a Board of Stakeholders, representing a plurality of interests, should have been created to guide the regulator. This Board should not be dominated by the finance industry. In fact, only a minority should come from the industry, thus ensuring that other voices are heard and policies are made by consensus. Its meetings would be held in the open and its minutes and working papers would be publicly available.

Employees, savers and borrowers have long-term interests and should elect directors and vote on their remuneration. Instead, the government is obsessed with shareholders who are often the source of problems. The Parliamentary Commission on Banking Standardsconcluded that “shareholders failed to control risk-taking in banks, and indeed were criticising some for excessive conservatism”. The typical shareholdingperiod in banks is about three months. Shareholders provide only a small amount of risk capital at banks. For example, at Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered, shareholders provide about 5%, 7%, 5%, 5.5% and 7.25% respectively of total capital. Shareholders are akin to traders and speculators and cannot invigilate bank directors.

In time, the missed opportunities for opening a new chapter in banking regulation will haunt the UK.

• This article first appeared on Open Democracy.

Three years after UK’s banking crisis, will reforms deliver?

Prem Sikka

Major proposals designed to reform Britain’s banking sector after its spectacular 2008 crash have been described as one of the biggest shakeups in a generation.

But they are likely be inadequate for a number of reasons.

Three years after the crisis saw banks such as the Royal Bank of Scotland and Lloyds caught up in the global sub-prime mortgage crisis, an independent banking commission has handed down its 358 page report into what went wrong.

The commission, headed by Sir John Vickers, suggests major reforms including ring-fencing the retail side from investment banking operations, arguably to protect depositors and borrowers from any future banking crash.

However, banks are given the option of deciding whether to ring-fence corporate deposits and loans or not – a notable concession to the banking lobby.

The report proposes a number of controls to limit the amount of money that can travel outside the newly established fence and regulators are expected to police it.

The banking crash showed that many banks were very highly leveraged and lacked resources to meet their obligations.

So the commission proposes that large UK retail banks should have equity capital of at least 10% of risk-weighted assets. As a cushion against future losses, banks are expected to set aside a “loss-absorber” fund of between 17-20% of certain assets.

This is to protect taxpayers and reduce their exposure to future bailouts.

The UK government is expected to implement the reforms by 2019, possibly in line with the global agreement on banking, the Basel III framework on capital adequacy.

So why will they be inadequate? Firstly, there is no scrutiny of the ability of the banks to create credit. As long as that remains the case, credit will have no relationship to the real economy and its ability to cause economic crisis will remain high.

The commission seems determined to ensure that banks remain corporate entities and all the pressures that such status brings.

For example, stock market pressures to increase earnings persuaded banks to engage in shady and risky practices. With the average tenure of CEOs at listed companies shrinking to four years, and still shrinking, executives have little incentive to think about the long-term issues.

Their focus is on private earnings and media star status. There is no consideration of the impact of systemic pressures on banking operations. The commission could have argued for consideration of alternative forms of ownerships.

For example, co-operatives, mutualisation, ownership by communities, employees or even nationalisation, but none of these are considered.

Neither does the commission mobilise democracy to check the selfish impulses of bankers. For example, it bemoans excessive remuneration for risk-taking, but thinks that voluntary codes will curb the excesses.

Well, they have not in the past. An alternative would have been to empower bank employees, depositors and borrowers to vote on executive remuneration. It is doubtful that bankers engaging in aggressive practices would ever manage to secure enough votes for their telephone number salaries.

The ring-fencing of the retail and investment arms is not the same as a legal separation and forcing banks to split their trade. Many banks have complex corporate structures spawning the globe and many operate in tax havens with poor regulation. So it is not clear how these operations are to be ring-fenced.

The commission does not scrutinise the funding of the speculative or the investment side of banking. Financial institutions are addicted to gambling.

At December 2007, just before the banking crash hit the headlines, the face value of the gambles (known as derivatives) on the movement of the price of commodities, interest rates, exchange rates and anything else, was $1148 trillion.

The global GDP is about $65 trillion. Just 1% exposure or loss can wreck the global economy. This speculative trading will continue to be funded with ordinary people’s savings by investment managers and financial intermediaries who will collect mega bucks if the gambles pay-off.

Otherwise innocent savers will pick up the losses. The commission could have argued for the removal of limited liability from all speculative trade so that speculators can’t dump losses on innocent bystanders.

The increase in capital bases may be welcomed but the banks failed because they were unable to meet their financial obligations. Therefore, the focus should be on solvency or availability of cash, but there are no particular suggestions.

The eventual reforms will inevitably be the outcome of political negotiations and bargaining.

Even if the commission’s proposals are fully implemented they are unlikely to cage the elephant for long because the systemic problems of banking and credit have not been addressed.

*This article first appeared on The Conversation website

Bad news and more bad news?

Hugo Radice on the UK's latest GDP figures, and how they relate to the global economic context.

On the face of it, the fall in UK national output (GDP) reported on Tuesday just adds to the mounting bad news for everyone, not least Chancellor George Osborne. Fears about a ‘double-dip’ recession, which would officially arrive if a further decline takes place in the first quarter of 2011, now look considerably more likely. Not surprisingly, most Red Pepper readers will now be concentrating their energies on the fight against the cuts. But for us as much as for employers and the Tory government, it’s important to keep a close eye on current developments in the economy. So what exactly does all the bad news add up to?

First of all, we live in a world in which the financial markets pretty much dictate the government’s policies, or at least their room for manoeuvre. Osborne’s attempt to blame the fall in GDP on the bad weather seemed to cut no ice in the City. There, the pundits and the speculators mostly concluded that the recovery had now stalled, and that the Bank of England would therefore delay the long-expected increase in its official lending rate of 0.5%.

Looking back on the growth recorded for July-September 2010, it now seems all too clear that the sudden boost to construction activity in that period owed more to a rush to complete current contracts before the spending cuts hit local authorities and government departments alike; so the sharp fall in the last quarter was as much a case of back to normal as the result of the big freeze.

In any case, last week’s unemployment figures made grim reading, back above 2½ million, with a particularly big rise in youth unemployment - and this well before the public sector cuts start hitting home in April. What is more a host of recent attitude surveys, among households as well as businesses, have suggested growing pessimism about our economic prospects and therefore a reluctance to make any big spending commitments. Add in the unexpected attack on the coalition’s lack of a growth strategy from the outgoing CBI chief Richard Lambert, and Osborne surely couldn’t maintain for much longer that shiny smile and confident air.

But although there obviously is a Plan B somewhere on his desk – to slow down the spending cuts and encourage the Bank of England to pump more cash into the banking system – the Chancellor is terrified that a change of direction would be seen by his masters (that’s the financial markets, remember, not us) as a sign of ‘weakness’.

Osborne himself has cited the International Monetary Fund’s latest update to its World Economic Outlook, issued on January 25, in support of his policies. The IMF, he said, approved of a robust approach to restoring the public finances. Well, yes, but only up to a point. The IMF update didn’t actually discuss the UK as such, and they qualified their approval of spending cuts by putting them in a wider context:

“A host of measures are needed in different countries to reduce vulnerabilities and rebalance growth in order to strengthen and sustain global growth in the years to come. In the advanced economies, the most pressing needs are to alleviate financial stress in the euro area and to push forward with needed repairs and reforms of the financial system as well as with medium-term fiscal consolidation. Such growth-enhancing policies would help address persistently high unemployment, a key challenge for these economies.” (Update, p.7)

Now the Eurozone governments have, with a lot of delays and haggling, begun to sort out the debt problems afflicting their ‘periphery’ (that is, Greece, Ireland, Portugal and Spain). They have created a Financial Stability Facility which has just successfully issued the first zone-wide Euro bond. The Chinese government in particular is keen on this development, because they want to diversify their own bond purchases away from the USA. But the markets, which as always in an uncertain recovery are particularly prone to rumours, fads and panics, are still worrying away at this issue. Oddly enough this is good news for Osborne, since problems in the Eurozone make British government bonds more attractive to investors.

However, there are two other global issues which we need to keep an eye on. The first is the one raised by the IMF, namely ‘reforms’ of the financial system. Last week (22 January) the chair of the Independent (sic) Banking Commission, Sir John Vickers, gave a lecture on the progress that the Commission is making on this. Given the often-stated views of the Governor of the Bank of England – and most academic commentators – it was hardly surprising that he highlighted the need to segregate the risky activities of ‘investment’ banking (issuing and trading financial assets of all kinds) from the activities of ‘commercial’ banking (dealing with payments and routine borrowing by households and firms).

The British Bankers’ Association spokesperson, Angela Knight, immediately announced that if new regulations were brought in that were too tough on the banks, they would up sticks and relocate abroad. Short of revolution (not a bad idea?) the way to head off this threat is to make sure that pretty much the same regulations are brought in everywhere, and especially in the USA, UK and the Eurozone. In the more than two years since the collapse of Lehman Brothers, progress on this has been painfully slow. In the USA, legislation was finally passed in July 2010 (the Dodd-Frank Act), but implementation is still being delayed, making because the banking lobby made sure that the proposals were incredibly cumbersome and riddled with contradictions. In the Eurozone, progress is also slow, partly because so many banks are massive holders of those dodgy Irish, Greek, Portuguese and Spanish government debt; so any financial squeeze on the banks threatens efforts to calm down the bond markets.

The second big issue is the tensions between China and the USA. Basically, for years there has been a dollar merry-go-round:

• ..... the US runs a big trade deficit with China, paying for the imports in dollars;
• the Chinese government then lends the dollars back to the US – mostly through buying US government bonds;
• the US government uses this money to keep taxes low, leaving households and businesses with more money to spend;
• and they spend it on Chinese imports.....

For years, US pundits have pointed out the irony of the richest and most powerful country in the world becoming financially dependent on what remains one of the poorer countries. But the vast majority of US citizens either don’t pay any attention to international affairs at all, or they just blithely assume that what Uncle Sam wants, he is entitled to get.

However, Chinese President Hu’s state visit to Washington last week brought the issue forcefully to a head. Treasury Secretary Geithner yet again called for an increase in the dollar exchange rate of the renminbi, to try to correct the trade imbalance. But the global context has changed dramatically since 2007. While the USA, as well as other major rich economies, have suffered sharp recessions and then slow jobless recoveries, China and other so-called emerging economies like India, Brazil and Russia took a smaller hit from the financial crisis, and rebounded quickly. Even Africa has in recent years experienced much faster growth than the rich countries.

This is a truly world-shaking shift. Back in the 1970s, the newly-confident post-colonial states of the Third World proposed, in the UN and other fora, a New International Economic Order. The idea was to place their development agenda at the heart of the international economic and financial order, using the leverage of their control over the supply of oil and other raw materials. At first the rich states tried to ignore these demands, so when oil prices were indeed raised sharply, they were plunged into inflation and stagnation. But from 1979, led by the UK and the USA, they took their revenge.

New economic policies of ruthless financial stringency plunged the Third World into a massive debt crisis and the ‘lost decade’ of the 1980s. Neoliberalism was unleashed across the globe, forcing debtor states to adopt policies that favoured capital (including foreign capital) over labour and private profit over state initiatives. And after the collapse of the Soviet bloc and the USSR in 1979-81, this leaner, meaner sort of capitalism became the universal norm.

The great irony is that the success of this strategy – from a capitalist point of view, that is – turned out to create formidable competitors. The Chinese and other new capitalist powers are rapidly increasing their share, not only of world consumer markets, but also of available raw materials. New Chinese, Indian and Brazilian transnationals are displacing the tired old US, Japanese and European firms. China has in recent years outstripped the World Bank as a source of so-called ‘development aid’ to Africa (as always, the ‘aid’ comes straight back to the donor in the form of orders for their goods).

In these circumstances, the power structures of global capitalism have become more and more outdated. The role of the dollar; the permanent seats on the UN security council; the inter-state bureaucracies in Geneva and New York; the voting systems in the IMF; these and countless other practices are being called into question.

For the American people, it is especially hard: that famous ‘city on a hill’ is bankrupt and crumbling, unable to be a beacon for anything except xenophobia and lax gun law. With the Tea Party Republicans on the rise, threatening everything from bombing Iran to hanging Julian Assange, there are plenty of reasons to be fearful.

Fortunately, help is at hand. For the great irony is that America’s real rulers – the corporate rich – have invested massively in the new capitalism of the East and the South. Knowing full well that the newly-confident ruling classes of those regions fully share their own ideology and objectives, they will ensure that the new American nationalism remains a matter of rhetoric alone. The dollar-go-round will not be abruptly halted.

How does all this impact upon working people in Britain? Well, it makes the outlook a bit better for exports and unemployment. But under the government’s present policies, Mervyn King told us on 25th January what to expect: declining living standards for years to come. As he said, such a long period of decline hasn’t been seen in Britain since the 1920s. As he must surely know, but didn’t say, this strikes at the heart of the political love affair of the so-called middle classes with consumerism and free-market individualism, a key element in the post-1945 political settlement.

What can the left do about it? Well, obviously fight every redundancy and every pay cut. But also, please, this time round, recognise that workers all over the world are in exactly the same situation. We are being urged to accept pay cuts so that we remain ‘competitive’, that is, put workers abroad out of a job instead. And they in turn are being told just the same thing by their own rulers. Time for an old, old slogan: workers of the world unite!

This article first appeared on the Red Pepper website

Rein in banks, PM told

From the Morning Star

The government was urged today to overhaul its "impotent" attempts to prevent greedy bankers from lining their pockets with six-figure bonuses.

Deputy Prime Minister Nick Clegg yesterday said that bankers' bonuses seem to be coming from "a parallel universe" as they prepare to pay out annual bonuses estimated to total £7 billion.

He also echoed Prime Minister David Cameron in saying that state-owned banks such as Royal Bank of Scotland should be sensitive to taxpayers' concerns when awarding extra payouts after it emerged that the bank's chief executive was to receive a £6.8 million pay package.

But both leaders have been accused of being all talk and no trousers in their pledges to rein in sky-high bankers' bonuses at a time of widespread cuts to pay and jobs.

Left Economics Advisory Panel co-ordinator Andrew Fisher said: "The old adage that 'you can't control what you don't own' needs updating in light of this government's impotent attempts to control bankers' bonuses.

"Attempts to cap pay or bonuses will prove futile unless the government sets bankers' pay and bonuses at these banks and it can't do that unless it takes control - something which is long overdue."

Labour MP John McDonnell has recently tabled two early day motions on bankers' bonuses and executive pay, which calls on the government to "tackle this grotesque display of inequality and outrageous greed."

High Pay Commission chairwoman Deborah Hargreaves said: "With banks preparing to pay multi-million pound bonuses, they are showing once again just how out of touch with the public mood they are.

"Mr Cameron has called on the banks to pay smaller bonuses, but it is high time the government took action itself to stop this bonanza."

She added that the coalition should follow the Irish government's lead and threaten to legislate against bonus payment at bailed-out banks unless they show restraint.

Labour leader Ed Miliband has called on the government to extend the tax on bankers' bonuses which raised £3.5bn in 2010, claiming it was "unfair" that the government's banking levy would raise less than half that sum this year at a time when ordinary families struggle to cope with a VAT rise.

Robin Hood Tax - a critical perspective

From Raphie de Santos of the SSP, reproduced from Facebook:

"I think the tax has a lot of problems at a lot of levels. First, it needs international agreement – most of these transactions are also off market – on unofficial over the counter (OTC) markets which are currently unsupervised. Far from curtailing banks from speculation it would push banks from a low margin execution business for pension and insurance funds where the margins are thin (we would end up paying through increased fees on running our pension/insurance funds) to trading for the Bank’s own account (speculative proprietary trading with high returns).

Brown and co know all this and that it will never be implemented. He is using it as a bit of Bank bashing ahead of the election. The real way would be to tax the banks investment banking profits and hit the high earners with a 100% tax above £100,000.

Of course really taking over the banks and using their tens of thousands of billions of pounds of assets for social use and closing down all their speculative businesses and turning their lending into social rents is the real way ahead. The Robin Hood Tax campaign is becoming a substitute for real action and something Brown and co can hide behind."

For those who haven't seen it here's the launch video, more details on the Robin Hood Tax campaign website.

The Finance Sector: What is it good for?

Gerry Gold

In the run-up to the 2012 Olympics, the New Labour government is hot favourite for victory in the financial events. Its bailout of the Royal Bank of Scotland (RBS) – so far amounting to a world-record £53.5 billion since the onset of the crisis in 2007 – is the major part of the total £74 billion of taxpayers' money the government has put into the banks, including RBS, Lloyds and HBOS, since the start of the financial crisis.

The increasing size of the bailouts shows one thing – the crisis is getting worse rather than better. The latest £25.5 billion for the RBS is part of a second bank bailout which adds up to £39.2 billion. This includes a smaller handout to Lloyds, but is overall £4.2 billion more than the 2008 amount. The Government is hoping this will keep the banks afloat whilst they tear themselves apart under instruction from the European Union's competition rules.

The dismemberment of systemically important 'too-big-to-fail' banks is a hot topic for the world's financial community, but there is no agreement on a co-ordinated package of regulation and reform. Some want to return to the regime established in the wake of the 1929 crash which separated high-risk investment – gambling – from the safer, but less profitable business of balancing deposits and lending.

Others, like the International Monetary Fund, are busy trying to work out how to reduce the grossly unsustainable government deficits resulting from attempts to prevent global meltdown. All of the schemes under discussion concentrate their attention on repairs to the financial system.

Mervyn King, Governor of the Bank of England, in a speech to Scottish business organisations, noted: "The sheer scale of support to the banking sector is breathtaking. In the UK … it is not far short of a trillion (that is, one thousand billion) pounds, close to two-thirds of the annual output of the entire economy. To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform". He went on: "It is hard to see how the existence of institutions that are "too important to fail" is consistent with their being in the private sector".

In his own way, King was questioning the raison d’être of the capitalist financial system. It is a question we need to ask. What exactly is the financial system for? What benefits does it bring to the majority of the six billion people who inhabit the planet? Why should it be bailed out? Have the institutions that make up the financial system passed their use-by date? Has the entire basis for their existence – support for the making of profit – receded into history?

Rather than resolving the contradictions between productive and finance capital, 50 years of globalisation have intensified them to breaking point. Post-war capital expansion funded by Keynes-inspired government funding ran into crisis in the late 1960s as the rate of profit fell. The loosening of regulation needed to allow the expansion of capital needed to mitigate the crisis produced transnational corporations trading on global markets via an international financial system.

The resultant massive increase in output of cheapened commodities not only further intensified pressure on profit rates but required a massive increase in consumption far beyond the means of workers' wages. Easy credit became necessary to facilitate the age of debt-financed overconsumption. So, the unprecedented expansion of finance was necessary to facilitate the expansion of capital itself and its market, to pursue the path of growth that has driven the exploitation of the planet's resources to the limits.

Growth needed finance and finance induced growth in a mad dance of mutually assured destruction. In the hysteria accompanying the myth of growth without limits, the players in the financial system became virtually and virtuously parasitic, recycling debt throughout the 24 hour global networks like there was no tomorrow. As it turned out there wasn't. Debt exploded beyond the ability of ordinary people to meet their repayments. When they stopped paying mortgage interest the system went into a tailspin. The bubble, as they say, burst.

The intertwined crises of collapsing consumer demand, shrinking global trade, declining manufacturing and inactive credit markets spell the end of the post-war era of a spiralling growth of commodity production fuelled by cheap labour and induced by debt. The overhang of state, personal and banking debt makes a 'return to growth' impossible. No new jobs are being created or will be. Mass redundancies will accelerate the rate of house repossessions, more pensions will be destroyed.

The way the financial sector collapsed into the arms of the state shows that both it and the system of production for profit it supports are no longer viable. Bankers thumb their noses at attempts to limit their bonuses to show that the system can neither be regulated nor reformed. The short shrift given to Gordon Brown’s support for a Tobin tax on transactions shows who is in charge.

Rather than trying to patch up a broken system by bankrupting the population, a government which is serious about solving the crisis would set about:

• shutting down speculative areas like stock markets, hedge funds, the carry trade in foreign exchange
• outlawing gambling in the derivatives casino
• replacing the entire for-profit financial system with a not-for-profit network of socially-owned financial institutions providing essential services. Many examples of these already exist: mutually-owned building societies, credit unions, the Co-operative bank
• establishing democratic control over the finance system, so that decisions can be made about which debts can be cancelled and which renegotiated: mortgages, for example could be renegotiated on the basis of the greatly reduced and declining market values

With the elimination of private equity shareholding, and the abolition of speculation on the money markets, the techniques developed by global capitalism can be used to clear payments between enterprises within and between countries. Accounting systems can be used and further developed to be open to public scrutiny. The dream of a moneyless, socialist society can become a reality.

*This article is taken from the LEAP Red Papers: The Cuts, which can be discussed in full on the LRC website

Darling kowtows to finance sector . . . bank on it

Yesterday, the Chancellor Alistair Darling set out his proposals for banking reform and regulation in a White Paper. You can read his Statement to the House of Commmons here.

So what did Darling propose? The Guardian states that he "ruled out caps on bankers' pay or breaking up the biggest City institutions".

The Telegraph reports that "many experts expressed scepticism that the new body would achieve much more than the existing standing committee".

The Financial Times quotes an anonymous 'big bank', which "described the planned changes to the Financial Services Compensation Scheme as 'a massive failure of policymaking'. 'We still need to be convinced of the benefits of a pre-funded compensation scheme,' it said. 'A major bank failure will always need government intervention in any case'."

This makes our response all the more pertinent, John McDonnell, LEAP Chair, said: "There is nothing new, it is just a timid re-branding of little more than the existing system".

"Banking is a fundamental public service which should be under public control. The least the Chancellor could have done would have been to split speculative banking from retail banking, and to bring retail banking under mutualised public control".

Unsurprisingly, the British Bankers' Association welcomed the paper. Angela Knight, BBA chief executive, said: "Banking is a global business and reform needs to be thoughtfully handled so moves in the UK dovetail with those overseas, ensuring the UK sector remains competitive. Otherwise business could move again."

Yes, we should be thankful it was the UK that the banking sector nearly bankrupted, and has indebted for a generation or more, and not somewhere else . . .