Get Red Pepper's email newsletter. Enter your email address to receive our latest articles, updates and news.
Illustration: Andrzej Krauze
‘Financial services must and will have a vital role to play in London and Britain’s economic future. That is why I am determined that the City of London remains one of the world’s most successful financial centres… Yes, we need radical reforms to the banking system to protect customers and taxpayers and support the wider economy. But we must also get the balance right and ensure reforms are pursued internationally to protect the hundreds of thousands of British jobs dependent on financial services… And while I support an international tax on financial transactions, doing it only in Europe and not including major financial centres such as New York risks real damage to the City.’
Ed Balls, London Evening Standard, 31 October 2011
The crisis that began in August 2007 and continues today required a policy response described by the Bank of England as the largest in financial markets since the outbreak of the first world war. It has destroyed public confidence in banks. The percentage of British people who agree that banks are well run fell from 90 per cent in 1983 to 19 per cent by 2009 – the biggest change in public attitudes ever recorded by the British Social Attitudes series.
Despite this, the crisis has produced only modest reforms. Impetus for significant further reform among policymakers has stalled. The Independent Banking Commission’s limited proposals for ring-fencing retail from wholesale banking were warmly welcomed by all political parties, and the Treasury was emboldened to the point where it could sell off Northern Rock to Richard Branson at a net loss to the taxpayer. This says much about the mindscapes of our political elites on banking reform – the absence of ambition and willingness to yield to vested interests by both coalition and opposition parties.
This was theatrically demonstrated by David Cameron’s attempt to secure an opt-out from European regulation at the December 2011 Brussels summit; and it was encapsulated in the October 2011 quote from Labour’s Ed Balls above. Balls’ comments are perhaps the more surprising given that they were made by the shadow chancellor of a social democratic party at a time when banks have publicly discredited themselves, when Britain’s economy is stalling due to ill-judged austerity policies and when his adversaries in government have made calculated attacks on the pay and conditions of his party’s electoral base. Balls’ apparent brief is to maintain a commitment to City interests and persuade voters that the UK’s future prosperity is inextricably linked to the success of financial services.
Ed Balls’ position is symptomatic of a larger failure. Since losing the May 2010 election, the Labour frontbench has failed to articulate meaningful policies for financial reform and growth in a post credit-bubble world. Its acquiescence is situated in a larger context of conservative governing structures, where elite power emasculates mass parties and disrupts democratic forces for change. Radical banking reform has been blocked under both New Labour and the coalition government because the crisis has consolidated elite power rather than weakened it.
Elite power and the metropolitan state
The crisis showed that the ‘hollowed out’ state is a myth. Metropolitan governing institutions in London were central to managing the crisis, placing governing institutions more firmly under elite control and investing those institutions with a new authority over economic policy making. There are four signs of this structural shift.
First, the core executive has become stronger. Before the crisis, the management of the financial system was conducted in the domain of low regulatory politics. The critical actor was the Financial Services Authority (FSA), a body financed by a levy on the financial industry and with a culture that brought it close to City interests. The sight of depositors queuing to withdraw their money from branches of Northern Rock on 14 September 2007 transformed everything.
The key actors in the core executive – the prime minister and his chancellor – took control. Initially, they tried to minimise their continuing involvement, spending millions on consultants’ fees to find a buyer for the failed Northern Rock bank. The intensification of the crisis after Lehman Brothers collapsed in autumn 2008 put an end to that. It proved necessary to accept that a large part of the banking system was now under state ownership, that this was a long term commitment and that some institutional means of managing it was needed. This was when United Kingdom Financial Investments (UKFI) was created for the task.
The fact that UKFI was lodged within the Treasury, and that its first CEO was John Kingman, the most successful civil servant of his generation, highlights a second feature revealed by the crisis: the ascendancy of that department. Under Gordon Brown’s chancellorship Treasury influence spread greatly and the crisis showed just how far it had moved centre stage. Brown’s successor as chancellor, Alistair Darling, was the major figure in the negotiations leading to the takeover of stricken banks in October 2008; the Treasury was the dominant voice in deciding what strategy would be adopted in managing those banks; it was the dominant voice in the post-crisis debates about the reform of the regulatory system; and it was the dominant voice in setting up UKFI.
The Treasury was not the only winner in the crisis. The regulatory system that failed so catastrophically in 2007–8 had been designed in the wake of an earlier fiasco – the 1995 collapse of Barings Bank. The Bank of England, which was responsible for banking supervision, had entirely failed to monitor and control Barings, and the system created in 1997 handed responsibility to the FSA.
The 2007–8 crisis led to bureaucratic infighting about the shape of the new regulatory system. The Bank argued that one source of the crisis had been the light touch regulation practised by the FSA and seized the opportunity to reclaim its lost bureaucratic territory. The FSA has been recast and absorbed into the Bank, which now controls the full range of banking supervisory institutions and, through monetary policy controls, the active element in macroeconomic policy. This is the third structural development post-crisis.
The fourth major feature of the structural shift has been the way the strengthening of the metropolitan state has taken place alongside the strengthening of the metropolitan financial elite. The period of pre-crisis deregulation saw a proliferation of competition in retail banking at the expense of the great metropolitan financial institutions. The crisis reversed that as failed bank operations (and therefore their market shares) were merged with or acquired by survivors, as when Barclays bought large parts of Lehman Brothers and HBOS was distress-merged with Lloyds. The long-term structural consequence of the crisis was to concentrate the domestic banking system in the hands of a small number of London-based institutions. In 2008 the four biggest banking institutions had a 64 per cent – and falling – share of the retail market. By 2010 this was back up to 77 per cent. Finance’s lobbying and policy influence is greatly facilitated by having no more than a handful of major players.
In summary, the effect of the crisis on the governing structures has been to centralise power, expand the domain of the core executive and greatly strengthen the traditional Bank/Treasury nexus of power in the Westminster governing system. It is hardly surprising that this augmented positional power was then used to defend elite principles and priorities to ensure very little changed. To understand these developments, though, we must also understand the pivotal alliance of forces between the dominant financial elites and the metropolitan political classes.
Alliance of elite forces
The greatest financial crisis in living memory; a regulatory fiasco; the destruction of public confidence in banks – all these have resulted in a strengthening of traditional power constellations. But the post-crisis developments described above do not mechanically produce policy. Policy is mediated by political forces through which interests are mobilised and decisions made. And the power of political forces usually depends on alliances. In the UK, the crucial alliance is a metropolitan one between the dominant elites from London finance and Westminster politicians, who are increasingly subservient because they are materially dependent on funding from the finance sector and practically detached from mass parties with provincial memberships.
The financial services revolution that began in the mid-1980s created and then concentrated in London a financial elite that drew its wealth from the City’s prominence as an international financial centre. Much of this wealth came from operations in wholesale markets, where small numbers of highly-paid workers build and trade assets at slim margins to generate large lumps of net income. Wholesale finance concentrates affluence in a tiny number of areas of London, most notoriously the ‘Square Mile’ covered by the City of London Corporation. This wealth is used to secure access and increase influence with political parties.
A striking development of recent decades has been the reconfiguration of the institutional mechanisms that convert this economic muscle into influence over policy, and this holds a key to making sense of what is going on. Two forces are at work: the consolidation of forces through the reorganisation and professionalisation of finance’s lobbying capacities within the City; and the alliance of forces through the changing relationship between London finance and the political parties.
In the late 1980s and 1990s the financial elite expanded and professionalised its lobbying operations. The City of London Corporation – until near the end of the 20th century largely a body with narrow local government and social functions – has likewise reorganised into a systematic lobby for City interests. A key change occurred in 2002, when the Corporation’s constitution was reformed and the City of London Ward Elections Act (2002) did something unique in British local government. The business vote elsewhere in the UK had finally been abolished in 1969. The 2002 Act not only retained it in the City, but greatly expanded the business franchise, so that business votes now outnumber those of residents. In other words, the financial elite is unique not only in British society but within the British business community: it controls its own system of local government.
The Corporation has applied its considerable historical endowments to building up its advocacy and economic intelligence capacities. It was the Corporation, for example, that provided much of the research for the post-crisis Bischoff report, a major restatement of the City’s traditional but exaggerated narrative about finance’s achievements in job creation and tax contribution. The financial elite thus entered the crisis of 2007–8 with a vastly superior lobbying operation to that it commanded in earlier crises.
The strengthening of the alliance between the core executive and the elite of the City has in turn been reinforced by the second force: the rise of a financial nexus between leading political parties and City interests. This development is important because it explains why the anger and dismay of civil society has not translated into any coherent programme of radical reform. The link is symbolised by the family backgrounds of the present prime minister and deputy, both offspring of the City working rich. But family background only dramatises key long-term changes in the financial relationship between political parties and City interests.
In the golden age of the mass party, the Conservatives, contrary to many myths, raised most of their income through local membership dues and fundraising activities. This mass party has now disappeared: there are presently only about 200,000 individual members in Conservative constituencies, most of them elderly. The decay of mass membership has had an important financial consequence: the party in the country is no longer a significant source of income. Moreover, increasing transparency about donations to parties – beginning with the 1967 Companies Act and culminating in the regulatory regime now run by the Electoral Commission – has made large corporations hesitant to contribute.
The party thus relies heavily on rich individual backers. The result can be seen in the financial history of the Conservatives under David Cameron. In 2005, when Cameron became leader, the financial services industries were the source of just under a quarter of total cash donations; by 2010 the figure had risen to just over 50 per cent. Much of this money comes from the working rich in financial services where a £50,000 annual donation makes the donor a member of the ‘Leader’s Group’, with an entitlement to meet the leader and other senior Conservative Party figures. Fifty thousand pounds a year is hobby money for most influential City millionaires.
The colonisation of the Conservative Party by the City plutocracy is an important clue to what has happened to the management of the financial crisis since the advent of the coalition government. But the wider decay of the political parties also explains why technocratic dissent and civil society protest has had such limited impact – and why Labour has been so unwilling to advance a counter-narrative on financial reform.
A series of democratic disconnects has disempowered the critics of finance in both the technocracy and civil society, making them unable to turn popular anger into effective reform. The critics of finance potentially represent a significant coalition but they have had very little success. This is because progressive collectivist politics depends on an alignment between constituencies and institutions that has not been made in this case.
For example, the pursuit of security through mass employment and social welfare under the post-1945 settlement depended on connecting the social technologies proposed by liberal collectivist technocrats like Keynes and Beveridge with mass parties like the Liberals or Labour. The connections between technocrats and parties made it possible to turn social techniques into manifesto demands and programmatic policies with parliamentary majorities, while at the same time articulating the civil society impulse for change. This was seldom straightforward but is now more difficult because technocrats, civil society and the Labour Party are compartmentalised and not communicating.
UK technocrats such as Mervyn King, schooled in mainstream neo-classical economics, would wish to maintain such separation between political and economic spheres. But Britain also produces radical technocrats such as Andrew Haldane, currently financial stability director at the Bank of England. Haldane is a critic of many priorities and practices in financial markets. For example, he criticises shareholder value-oriented business models in finance for their tendency to encourage banks to pursue high returns on equity at the expense of low returns on assets. This basically means that banks ramp their leverage (debt position) to generate high rates of return on their equity, often by taking speculative bets on (often, low yielding) investments.
Haldane’s Wincot lecture of October 2011 proposed radical reforms, including capital ratios of up to 20 per cent (as opposed to the current proposal of 10 per cent), removing tax privileges on debt and ending the shareholder monopoly of governance. But this radicalism falls outside what is currently considered politically possible and the sentiments expressed by leading opposition MPs such as Balls. Haldane and his radical ideas were never mentioned publicly in the 2010 election campaign, despite his eminent position within the Bank.
Financial reform is also promoted by a wide range of principled critics: the NGOs, churches and ad hoc lobby groups that were articulating criticisms of market practices even before the crisis. UK Uncut and ‘Occupy’ protests spread globally through social media but are excluded from the mainstream technocratic reform agenda and the political establishment. Protest camps may have given the critics of finance a public stage but they are nowhere near the legislature.
Labour, the obvious ally of radical technocrats and civil society critics, is now an obstacle to mobilisation. Intellectually, it is disabled by its acceptance of a narrative that pictures the City as key to British economic success. Institutionally, Labour is more likely to yield to business interests because it too has withered as a mass movement. Its roots in civil society are weak because its membership is ageing and numbers have declined. The result is the evolution of the Labour Party into a metropolitan cadre of professional politicians increasingly detached from the grassroots, lacking the vocabulary and the capacity to connect with civil society critics of the financial elite.
The effect of these disconnects is that democracy does not work. As the opening Ed Balls quotation demonstrates, Labour is stuck in groundhog day (just like the coalition government), repeating its commitment to a competitive and successful finance centre in London that undermines the possibility of reform, including the financial transaction tax.
The effectiveness of elite power is well indicated by this groundhog day simile. In policy terms we seem condemned to find each new day is just like before, as in the film Groundhog Day, where Bill Murray is trapped in a time loop so that every new morning he wakes at 6am on 2 February with Sonny and Cher playing on the clock radio.
This time loop may not be immediately obvious in complex capitalist societies because the flux of events and performance changes with each new conjuncture. The period after 2008 in the UK is obviously different to that which preceded it, in terms of GDP growth and employment. But if we consider the operating principles and priorities of effective elite power, very little has changed: reform of the finance system continues to be decided congenially by elite alliance, not through mass incursion. More worryingly, the post-crisis policy-making and regulatory structures appear to have consolidated financial elite power within the metropolitan state, despite the very public discrediting of much of its activity.
It is within this context that we should understand the unfolding policy debacle. The standard policy mix in the UK and EU combines austerity for the masses with various schemes to inject liquidity into ailing and possibly insolvent banking systems. This is almost certainly the wrong way to deal with a crisis that always was and remains one of the scale, complexity and opacity of private sector banking liabilities.
The emphasis on eurozone sovereign debt is in this sense a distraction because the causes of the crisis are rooted in the scale and fragility of highly levered balance sheets of private sector banks, in the complex products that they created that have an accounting value but no market price, and in the complex interconnections between diverse markets and institutions forged as the vortex of financial speculation before 2008 pulled everything to its centre. The problem of banking reform requires the managed restructuring of private sector bank liabilities, the simplification of the activity and the control of labour costs – just the kind of interventions any other distressed private sector enterprise would face.
This article updates and summarises arguments about banking and elite power that are more fully documented in After the Great Complacence, by Ewald Engelen et al (Oxford University Press, 2011)
The immediate prospects for financial reform are indeed dismal, but change is coming from below, argues Jonathan StevensonIt’s easy to forget how far the ‘principled critics’ of finance have come since 2008. In the aftermath of the crash, the economic logic of the bank bailouts was barely questioned from the left. Attempts at collective organisation failed to bloom into ongoing resistance. Only the symbolic issue of bankers’ bonuses achieved any resonance with the public. It took the clarity of George Osborne’s emergency budget to break the spell, sparking the anti-cuts and student movements and galvanising the trade unions.
While these movements have been building the organisation to defend public services, some imaginative media activism has gone on the offensive. By tying corporate tax avoidance to the cuts, UK Uncut has helped expose the values that underpin neoliberal economics. Focusing on deals that have already been done – from Vodafone’s takeover liabilities to Arcadia’s past dividends – it has rejected quick wins in favour of sharpening a narrative that demonstrates the logic of the system. Even if the government wanted to reopen some of the disputed tax cases, it may not be able to. As one targeted corporate executive told the Guardian, ‘This is the most difficult communications issue I have ever faced.’
The Occupy movement has taken this focus on economics and added a second dimension: democracy. ‘The 99 per cent’ is not the result of an opinion poll, but an assertion of a political constituency. No matter that a lesser percentage pledge their support, this movement stakes the claim that these interests have no representation in the political system. And while many on the left have criticised Occupy’s reluctance to issue a detailed set of demands, the need to go deeper and change the terms of the conversation has been key to its effectiveness. Witness Republican strategist Frank Luntz saying: ‘I’m so scared of this anti-Wall Street effort. I’m frightened to death. They’re having an impact on what the American people think of capitalism.’
Westminster has responded, as it always does, with a change in the mood music. Before Christmas news of a parliamentary investigation into billion-pound corporate tax avoidance made the front pages. In January, coalition MPs vied on Newsnight to take the credit for doing the most to tackle it. Now Clegg, Cameron and Miliband all claim to be working for a more responsible capitalism. Far from being ‘nowhere near the legislature’, as Adam Leaver suggests in his essay, critics of global finance now arguably face the opposite problem: co-optation.
Tensions within the Occupy London process have brought this into focus. On the one hand the outreach working group, the Tent City University outside St Paul’s and the Bank of Ideas (in an occupied UBS office building) have begun the slow business of economic and political education, both inviting the general public to drop by and taking the idea of Occupy as a participative political space out into schools and communities. On the other, an economics working group has run a media‑focused campaign on the legal status of the City of London Corporation, engaged with the Financial Services Authority and, aping the political mainstream, started work on policy papers to submit to government.
The challenge now is to develop the radical ideas and widespread organisations capable of altering the balance of power, not just of getting in the media. This means organising collectively to defend public services, but also to tackle the big challenges in the wider economy.
One is debt: the systemic problem of excessive debt – not just in Britain but in Western economies for the last 30 years, as a substitute for rising wages – is unaddressed. Calls for a debt default from below – the only solution to an endless spiral of bailouts and austerity – are most developed in Greece, but other Euro-periphery countries like Ireland and Portugal are catching up. This can only increase as austerity rolls out and people understand whose bills they are paying.
A second challenge is rebalancing the economy, away from financial services and towards (the arguably oxymoronic) green growth. This is essential to break the loop that tied New Labour to the City and equip society for an era of climate breakdown. It could occur narrowly, or it could be part of a widespread democratisation of the economy, socialising the banking system through credit unions, remutualisation and community finance.
Uprooting three decades of neoliberalism was always going to take longer than four years. We should not be surprised that well-positioned elites have consolidated their position, despite its injustice. The challenge is to stay ambitious and not settle for scraps off the table. After all, in Groundhog Day, the loop proves not to be a trap but an opportunity.
Jonathan Stevenson works at the Jubilee Debt Campaign and has been active in Hackney Uncut and Occupy LSX