The recession may not yet have reached its mid-way point, but already the lessons that seemed so stark in the immediate aftermath of the financial meltdown are receding fast.  The way out of recession is apparently being directed by traffic lights and signposts controlled by worryingly familiar faces.

Foremost amongst these phoenix-like revivals are the banks.  Just months after they were rightly seen as basket cases – their irresponsibility and greed the primary causes of the recession and their very survival requiring billions of pounds of handouts from the hard-pressed taxpayer - they are back in the box seat, not only apparently immune from reform or regulation, but again paying out huge bonuses, and their unchanged role accepted as essential to economic recovery.

According to their own pronouncements, the least surprised at any of this are the banks themselves.  Are their affairs not directed by the most brilliant operators who can only be attracted by huge salaries, bonuses, fees and commissions?  Is our economic future not totally dependent on their freedom to make as much money as they can for themselves and their shareholders?  Is the recession not itself proof that the banking function is not only too important to be allowed to fail but is in the end best left to those who know what they are doing?

Some of these claims can be summarily dismissed as laughable examples of special pleading.  A plumber or bus driver who proved himself so incompetent at what he was employed to do that he flooded the house or crashed the bus could not claim that he was uniquely qualified for a supremely demanding occupation, but would be out of a job.  Bankers who destroy the financial system should be similarly judged.

And our supposed dependence on the City’s earnings is - far from being a reason for re-instating the status quo ante – a striking warning against allowing this dangerous situation to arise again.  Among the many lessons we should not forget is that City earnings not only go to a tiny fraction of society but require support from an economic policy which – by giving priority to those who manipulate existing wealth over those who invest in and create new wealth - is guaranteed to destroy other kinds of economic activity, particularly in the real, as opposed to financial, economy.  Those who have lost jobs in manufacturing, for example, have literally paid for the bonuses “earned” by City fat cats.

Perhaps the most surprising of the claims made is that the banking function is of central importance to the whole economy but should at the same time remain in the hands of a private oligopoly – and an oligopoly that is entitled to put its own interests ahead of the general interest.  Even more surprisingly, after all that we have recently experienced, this argument seems to have been accepted without demur by the government that spent our billions on rescuing the banks.

It has always been a mystery that the banking function – which in macro-economic terms means essentially the creation of credit and therefore of money – should have been allowed to develop in private hands.  The banks have avoided scrutiny on this issue, first by (improbably) denying that they create money, secondly by arguing that the function is in any case so important to the economy that it would be too dangerous to disturb it and finally by maintaining that only they have the expertise to discharge the function anyway - and all this at a time when the prevailing orthodoxy is that the most important factor in economic management is the rate of growth in the money supply, so that the banks’ central role in the creation of credit – the most important single factor in the excessive growth in the money supply – has an additional and unmistakeable macro-economic impact.

What the recession has demonstrated is that none of these defences can stand.  The first stage of the financial crisis was largely one of liquidity and arose because the banks’ (supposedly non-existent) ability to create credit was brought to a halt.  This required government intervention on a massive scale – so much for the argument that the bankers’ role should not be disturbed – and this in turn showed that it was not the bankers’ expertise (which was manifestly in very short supply) but government resources that underpinned the banking function.

So, if the public has an intense interest in the proper discharge of the banking function, and the last-resort guarantor is the public purse from which billions of our money have been spent, why are we content to allow the private oligopoly to proceed on its merry way and to decide in their own interests issues that matter to all of us and that should be placed under democratic control?  Why would we not consider some form of public ownership (we have, after all, paid many times over for banks that were virtually worthless) or, at the very least, a degree of effective regulation to ensure that the public interest was protected and that the banking function served that interest rather than private greed?

The prize is, after all, a banking system that serves the wider economy and not just itself.  Our failure (or refusal) to see this shows just how deeply ingrained is our frame of reference, and how much at risk we remain from a repetition of past errors.

Bryan Gould

10 August 2009