Our financial system only works for the 1%. It will take another crash to fix it

That’s the title of my latest article in The Guardian. Opening paras

The royal commission into banks has uncovered fraud and misconduct on a massive scale, amounting to nearly $1bn and perhaps more. The usual defences of “bad apples” and “rogue advisers” have fallen apart as it becomes evident the problems are systemic, driven by relentless pressure from the top to maximise profits at all costs.

The royal commission into misconduct in the banking, superannuation and financial services industry has shown that dishonesty and sharp practice are endemic in the retail banking and finance sector. But if retail banking, involving direct personal contact with customers, is plagued with fraud and malpractice, what can we say about the wholesale criminality

A billion dollars sounds like a lot but it pales into insignificance compared to the repeated frauds that have been exposed in global financial markets, and the much greater volume that is almost certainly going undetected. Moreover, while misconduct in retail banking raises important issues of consumer protection, fraud in the broader financial system calls the entire market system into question.

Conclusion “We will probably have to wait for another crash before the power of the financial system can be tamed.”

18 thoughts on “Our financial system only works for the 1%. It will take another crash to fix it

  1. “Why will anything change after the next one?”

    Could anything replace the Bernie Ripoll rubber stamp?

  2. Are the financial crashes not a method to reverse the post war wealth equality back to the dominance of the 1%?
    Both a recession and its ‘cure’ (QE?) redistribute wealth MORE unequally than before.

  3. J.Q.

    Perhaps you should have mentioned the Paradise Papers as well? But any article which mentioned all the major financial scandals of the last 20 years would be a long article indeed. A crash to fix things sounds a little like a “salutary disaster”. Of course, it is not a new idea that a major crisis is necessary to initiate demands and actions for solutions.

    What concerns me is the parlous state of democracy in the world. When we consider the two great powers who dominate the world, we see this. The USA is ruled by corporate and plutocratic capital. China is ruled by a Party dictatorship and run according to crony capitalism principles

    A genuine democratic revolution is required in at least one of these countries to change the global dynamics. Europe is too fractured I think. The USA seems the only possible candidate and even that does not look hopeful. But prediction is difficult, especially about the future!

  4. Hi John. I was just reading your article in the guardian on the 1%ters and banks “financial used capitalism”. I wondered why you thought another financial collapse would sort them out? Haven’t we had a few of those already with no foreseeable change (on behalf of any body that has a chance of doing so?)? Great writing, shame about the financial bollocks continued to be heaped on the rest of us. Cheers. Matt N

  5. Matt, it’s like how there were plenty of people who were willing to say The Last Jedi was a good movie when it wasn’t but then nobody went to see Solo. While financial fanboyism may seem unaffected and as strong as ever, support has been damaged and confidence lost or at least reduced. As a result, when another serious blow occurs it will be more telling.

  6. The world financial system was able to be regulated after the Second World War because every major country in the world except the United States was broke, physically devastated or both. Plus the Cold War lent itself to control over everything to fend off the Soviet threat. Anti-communism took priority over free markets.

    These conditions are unlikely to be repeated. A mere crash of the financial system is unlikely to be a big enough event to bring about the de-financilalisation that John seeks.

  7. John, I would be interested on your opinion of this. Thanks
    Your Gaurdian article seemed accurate to me. Not sure how we get TPTB to change track, sadly.

  8. I liked you earlier idea of running the banks as simple savings institutions that collect savings and make loans to credit-worthy customers. The difficulty here seems to be the profit motive.

  9. What’s missing here is a politically credible six-point reform agenda.
    To get the ball rolling, and off the top of my head:
    1. Robust consumer protection watchdogs.
    2. Tobin taxes to cut artificial transactions and hypertrading.
    3. Reimposition of international capital controls, favouring real direct investment flows over short-term financial ones.
    4. Ending tax havens. By themselves, these are powerless small jurisdictions; it’s only the global finance industry keeping them going.
    5. Apportionment of corporate taxes according to some weighted index of real economic activity based on elements like value added, fixed assets and payroll. (Both internationally and within federal states.)
    6. Cap on market share for retail banking (say 10% in any significant market). This would force many breakups and recreate competition.

  10. Westpac’s BT Financial has yielded 0.5% returns on its cash holdings over the past 5 years, to its mainly elderly and nervous customers, while its Chief Executive Brad Cooper pocketed $28.8m of which $8.7m is in cash bonuses.

    The return on investing in government bonds over this period was 2.5%.

    “Rear Window”, in today’s AFR, provides a tribute to this financial genius.

    Do I feel miserably resentful? You bet. The sharpies versus poor, nervous retirees.

  11. I liked you earlier idea of running the banks as simple savings institutions that collect savings and make loans to credit-worthy customers. The difficulty here seems to be the profit motive.

    Eh, kinda. The problem is, there’s so much money floating around in the short term money market that it’s actually cheaper to get your loan funds wholesale than from from over-the-counter depositors. Not just lower overheads, but

    The important point to note is that the vast majority of this hot money is probably stollen. I mean, not just morally but legally, acquired as a result of malfeasance by government officials. They’ll take low interest rates and risky projects. even substantial negative returns where normal people will stick with cash, because it’ll all help hide the source.

    Also note that Donald Trump appears to basically be a professional money launderer, and that the Brexit push from within the UK conservative party is closely tied to secretive-money City interests and may be driven by timelines wrt investment secrecy. There’s… I won’t say it’s a “conspiracy”, as such, because if economics teaches us one thing it’s about how coordinated interests give rise to a similar appearance to overt communication, but a distinctive set of patterns of behaviour.

  12. … a professional money launderer …

    That’s an odd expression when you think about it. After all, why would there be such a thing as an amateur money launderer?

  13. There have been a lot of words written about the findings of the banking royal commission, mostly comments on what are essentially symptoms of complex underlying issues, which few appear to understand. Some have tried and one explanation is “culture” as if that word could enlighten us on all the world’s problems. Having read the commission’s hearings on lending issues it becomes apparent that there are in fact very few real bankers working in banks anymore. I should disclose that my remarks are informed by a 47-year career in banking.
    Interestingly Woodside Petroleum chief executive Peter Coleman came very close when he recently said, apropos the royal commission, that ..” it’s really about business practices and controls”
    So what practises are we talking about? Perhaps an analogy or two would help. Imagine visiting your (very young) GP for a general check-up which the doctor conducts in a very cursory manner. The doctor’s explanation is that GP’s don’t know how to check blood pressure or use a stethoscope anymore and now rely on predictions based on ABS and other data sources. Or imagine visiting a hospital and you notice that nurses are not carrying out hand hygiene procedures. When you ask why you are informed that the hospital manager, who has a background in construction, considers it scientific mumbo jumbo, is costly and unnecessary.
    To translate: a bank using the household expenditure measure (HEM) is like not picking up a stethoscope; banks not meeting prospective borrowers (because the applications are made on-line or through brokers) is like not washing your hands. These are basic, fundamental principles. If you don’t do these things you don’t pass go. There are of course hundreds more examples. The crux of it is that unless banks start to re-engage with time tested professional banking practices there will indeed be more crashes and enquiries.

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