15 September 2018 marks a full decade since the collapse of Lehman Brothers, a pivotal moment in a global financial crisis, the effects of which we are still reeling from today.
So what is the picture ten years on? Stock markets are hitting all time highs, and the number of UK millionaires has shot up by 41 per cent over the past five years. Meanwhile 1 in 8 workers in the UK can’t afford 3 meals a day, low-paid jobs are proliferating and food bank use is soaring. In the UK, wages have seen the worst pay decline since the Victorian era, and they have stagnated for the longest time in 200 years. We are part of a bleak global picture where 1% of people own 45% of the world’s wealth. And to top it off, extreme weather events this summer are seeing the catastrophic effects of climate change unleashed around the world.
There are of course countless more statistics which are both terrifying, and upsetting. These scary stats are all connected, and are all symptoms of deep structural issues all around us, and together they paint quite a clear picture of the political-economic system, also known as neoliberalism, that has dominated over the last few decades breaking down.
We are in the midst of a crisis both of political economy and economic thinking. Ten years ago the dominant school of economic thought, neoclassical economics, failed spectacularly to predict the global financial crash. It then failed to have any answers for why it happened and what we should do to recover. The failure to turn the shock of the crash into a programme of structural reform meant that the financial crisis morphed into a perceived crisis of government spending, which resulted in austerity being rolled out across countries, unsurprisingly supported by multilateral institutions like the IMF and OECD. As a result, it was the people who did the least to cause the crisis who suffered the most.
Large swathes of the population have been excluded from the ‘economic recovery’ – indeed, for many people things have only gotten worse. It is therefore no surprise that public distrust of the banks remains high. A YouGov poll commissioned by Positive Money in August 2018 found that 66% of Britons don’t trust banks to work in the best interests of UK society. 72% believe banks should have faced more severe penalties for their role in the financial crisis, and 63% are worried that banks may cause another financial crisis, of which 17% are “very worried” and 46% “fairly worried”.
Disappointingly, regulation since the crash has only focused on risk management, making banks safer and more resilient in a crash, adding financial stability to the Bank of England’s mandate, and ring-fencing. Whilst all of these are welcome moves, they don’t do much to actually make banking and finance serve people – rather than the other way around.
It is clear that the establishment view hasn’t changed. The governor of the Bank of England, Mark Carney, has made recent statements saying that the UK should double the size of its financial sector over the next 25 years, salivating at the idea that Britain could ‘become the investment banker of Europe’ after Brexit. But the banking and finance sector is by its nature rent-seeking, and so gets bigger through wealth extraction from the rest of the economy. This makes its growth a cause for concern, rather than celebration.
Furthermore, less than 10% of new lending goes towards productive purposes which support the real economy. The vast majority is lent to property and financial markets, resulting in an economy skewed towards housing bubbles, finance, and asset price inflation, whilst people have to rely on taking on more and more debt to top up falling incomes.
Despite delivering negligible social benefit, our banks enjoy a huge public subsidy. Banks have the unique privilege of creating our money, when they make loans. They’re able to do this in the knowledge that if their loans go bad, the taxpayer will step in to protect citizens’ deposits.
This state protection means that banks can get away with paying depositors almost no interest, despite charging high interest rates on their loans. The value of this effective subsidy to UK commercial banks is calculated at around £25 billion every year. When there’s a recession, UK banks stop lending altogether, requiring huge publicly-funded incentives to start lending again. While £133 billion of taxpayer money was used to bail out banks in the last crisis, the true cost in terms of lost output and jobs has been estimated by the Bank of England’s chief economist as up to £7.4 trillion
So what can we do to change things? For a start, Positive Money has been calling on the Bank of England to reform quantitative easing (QE). The thinking behind QE was that it would encourage banks to lend into the economy, with the hope that this would then boost the economy through the infamous ‘trickle down’ mechanism. It’s not having that effect. Again, it’s been demonstrated that wealth simply doesn’t ‘trickle down’. Instead, the primary impact of Quantative Easing has been to make the rich richer by boosting asset prices. The Bank of England’s own analysis finds that the wealthiest 10% of households have benefitted by £350,000 each as a result of QE. Perhaps we could forgive the policy as the best tool available in a hurry after the crash, but in 2016 the Bank of England responded to the Brexit vote with a second round of QE, increasing the amount created to a total £445 billion. This is a policy they know results in increased in wealth held by those at the top of the wealth pyramid. To say that is the best the Bank can do is unacceptable.
But it’s not just the Bank of England that needs to change. Ultimately what we want to see is a financial sector that serves society, with its powers reined in so it is under effective control of government. The sector’s incentive to earn rewards would be through facilitating long-term investment rather than by gambling through short-term speculation. Proper regulation is essential to protect us from the risk of its unchecked activities running out-of-control.
This means the government making good on promises to end ‘too big to fail’ banking, by breaking up the banks, starting with publicly-owned RBS. It also means facilitating the financial systems transition from fossil fuels without sparking a financial collapse. Other measures should include making the financial sector pays its fair share in tax, as well as action to stop bank branch closures and to protect the public’s access to cash.
In these turbulent and highly uncertain times, what is clear is that the most powerful economic institutions, central banks, are not receiving adequate scrutiny. If what emerges from the breakdown of the current system does not seek to democratise central banks, and the banking and financial sector at large, then it is unlikely that a truly fairer, more democratic, and more equal society will emerge.
Fran Boait is the executive director of Positive Money.