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Back in May I posted on a distinctive message for the next election. This post looks at the defining global political issue since 2008: no, not the House of Lords; the financial sector.
Long before the LIBOR scandal, the financial industry dragged millions into poverty, awarding the perpetrators staggering salaries. But you already knew that. What we need is an intelligent, credible policy response. It is tempting to announce that millionaire bankers should be boiled in oil, but as some Liberal Democrats have bravely argued, finance is important in the UK, employing lots of people, not all of whom are rapacious millionaires. However, Mervyn King is right: “of all the many ways of organising banking, the worst is the one we have today”. We need to find a way to return banks to a service that enables other parts of the economy to grow.
Two policies would help: the first is rebalancing risk and reward. Directors of financial institutions should be strictly liable (meaning liable without the need to prove individual fault) for losses at their institutions. Directors should carry unlimited personal liability and post sizeable cash bonds as part of the capital of their bank. When RBS goes bust, Fred Goodwin goes bust.
At the institutional level, we must tackle perverse incentives. Few people realise that current accounting rules allow banks to book “profits” that have not been received; in other words these profits are illusory. Don’t take my word for it – the Adam Smith Institute (hardly anti-finance) has proved it. Casino accounting has led to an explosion in derivatives liabilities: UK banks’ derivative liabilities are three times what they were in June 2007 (in 2012, £4.6 trillion. UK GDP is a mere £1.45 trillion). So as well as making directors liable, banks must account for profits straighforwardly. This isn’t my idea – a Tory MP proposed it but his party didn’t support it. We should, whilst pushing not just for ring-fencing retail and casino banking, but full separation.
The second idea is one that might make the Chancellor shudder – a pasty tax for finance. Whilst VAT on hot food proved beyond George Osborne, extending VAT to finance (Financial Activities Tax or FAT) would prevent the finance sector becoming too large and limit excessive risk-taking. As Osborne defends bankers’ bonuses, whilst his boss attacks the Financial Transactions Tax (FTT), we should take the lead role in Europe converting the FTT, fraught with downsides, into FAT, which has IMF and central bankers’ support.
Osborne’s ruse is pretty clear – if we are the only place in Europe with uncapped bonuses and untaxed trading, the City will grow. That merely increases the unbalanced nature of our economy. Those who argue against a FAT will say that business will migrate elsewhere: but if the UK and Japan joined the rest of the EU, a massive proportion of global financial transactions would be covered. Making fat-cats into FAT-cats, or more simply, making bankers pay their way – proportionally and carefully, is something the Liberal Democrats must make their own.
