Reacting to the financial world's desire to return to the past. Big banks, especially but not solely in the US, are planning to shake off restrictions on their autonomy even in the purely financial field. This is not a conspiracy theory concocted with political motives - the banks themselves are open about it and are taking action to achieve it. Most of the restrictions on banks' autonomy are rules accompanying the public bailouts. Banks that are able to pay back the funding they received (or say that they are planning to repay it) are making no attempt to hide the fact that the reason for this is to win back full freedom to behave as they will, and return to the old ways in terms of speculation, directors' pay and trading bonuses. This is all interconnected. The complicated derivatives used for speculation (at times, even the experts don't fully understand them) can generate eye-watering profits, along with whopping bonuses for the traders. They can also generate eye-watering losses, of course, but then the state intervenes to prevent the collapse of too-big-to-fail banks that would wipe out savings and cause financial meltdown.
As usual, the true situation is not quite as straightforward and clear-cut. In reality, controls have become more effective, surveillance more severe and ratings agencies no longer behave as blithely as in the past to conflicts of interest, but plenty of questions certainly remain to be answered.
This change in the attitude of the banks is being greeted with irrational delight or irrational dismay, depending on one's political leanings. Some people say the important thing is to introduce proper discipline so banks can be given freedom to act but in a new way. Others say banks have already won the battle and although they should respect a few extra rules (mainly on transparency), it's back to business as usual. Economists fall into one of these two camps, depending on their political convictions or preferences (they are well aware that either group can win the Nobel Prize). The authorities are trying to take account of arguments in both directions - in the EU, where there is no single political direction, this cannot be avoided and has already led to a balanced EU line being taken, determining the outline of the new EU rules governing the world of finance and preparing new legislation(see my column in yesterday's newsletter). The European Commission is preparing an impressive number of new rules based on research by high-ranking figures, and these are being discussed by EU finance ministers - discussions this newsletter regularly reports back upon.
The European Parliament's powers and responsibilities. Against this backdrop and because it is a co-legislator, the European Parliament will have increasing importance as long as debate does not degenerate into a demagogic slanging match between opposing doctrines. The special temporary committee on the financial, economic and social crisis (chaired by German Liberal Wolf Klinz and four deputy chairs to cover the four main political trends) does not have any legislative powers as such, but is planning to unveil operational proposals by next summer to submit to the relevant parliamentary committees dealing with the heart of the matter (see issue 9999 of our newsletter). The idea is to develop an EU overview of all areas of the crisis while avoiding reports by high-ranking figures (like university professors, according to Luxembourg Socialist MEP, Robert Goebbels, who wants to make doubly sure the report does not end up being ignored). Rapporteur Pervenche Berès, a French Socialist, has given general guidelines: “The financial markets have to work for people and for the economy, rather than the other way around. Europe is facing major challenges - the growth model for the future, climate change, energy independence and an ageing population. The EU cannot meet these challenges without properly functioning, properly regulated and duly responsible financial markets.” The idea expressed here is not that of financial markets being separate and autonomous from the rest of society and the rest of the economy, and is not that of financial markets deciding for themselves on the rules that suit them. We shall see whether the special committee takes this line.
The EP's economic and monetary affairs committee will be directly responsible for the legislation being prepared. Behind the scenes at the EP, the appointment of Sharon Bowles to chair the committee has raised many eyebrows. A Liberal - and a Brit for that matter! - Sharon Bowles says that her views are not as far removed from those of the other main political parties as people make out - she agrees with most of the views already expressed by the EP (backed by the main political parties) and makes reassuring noises about the prospect of the committee reaching a balanced view that it can then submit to the full EP in plenary.
New rules will take time to prepare (even if some of them have immediate action). The optimists seem to be ignoring a key question - banks are trying to win back full freedom right now, but the new rules currently being devised will take time to prepare and implement. This will take months, or even years, depending on the rules in question, particularly for regulations that have to be truly international to avoid creating an uneven playing field and therefore need to be negotiated by the EU and its main partners. How effective will these new rules be given that the banks are already returning to the bad old ways of the past - the very behaviour that the new regulations are meant to control (or ban)?
A partial answer to this question is that some new rules can be applied quite fast. At the end of last week, the G20 financial summit called for the immediate implementation of “healthy practices” on directors' pay and bonuses (where such practices have been defined). In some countries, the new rules have already been applied and others will soon be introducing them. No doubt this will put a halt to some of the most ridiculous behaviour within the current structure that allows the use of extremely complicated speculation using derivatives. This is an improvement on the current system but does not do away with the system.
Equally hypothetical and distant is the prospect of levying a tax on financial transactions. Even Gordon Brown, when mooting the idea of a Tobin Tax last week, described it as one of a number of options, along with the idea of an insurance premium to reflect the level of risk, or a levy on operations. Dominique Strauss-Kahn, the director general of the International Monetary Fund (IMF), has called for an insurance premium to be levied by the IMF on banks (an IMF tax) and will be publishing a report on this in the spring of next year, along with a second report in May. All options are open - it is not clear whether this would be a tax on transactions, or a tax on banks (or traders' bonuses). Most financial matters these days require global solutions to avoid firms upping sticks and heading off to countries where the rules are more relaxed.
I am clearly not trying to set out a cut-and-dried solution here or to choose among the options available. Instead, I have a more modest aim - to point out that nothing has been decided upon and it will take months, if not years, before decisions are actually taken. At the same time, the banks want to return to their old ways right now. In the United States, a 90% pay cut was imposed on directors and traders in banks bailed out by the state, but banks that pay back the monies pumped in by the state can pay their directors and traders as much as they like. No wonder some bank managers are in such a hurry…
The fundamental question. For the moment, even the key fundamental question has not been answered - Should a fundamental distinction be introduced between banks that fund the real economy and banks that speculate on the financial markets? This is not an academic issue - such a separation was introduced during the Great Depression in the United States in the 1930s and remained in place for many a long year. There is heated debate on the issue and it is not easy to distinguish between sensible, objective considerations and those hiding vested interests. Supporters of separate treatment (headed in the United States by former president of the Federal Reserve Paul Volcker who is one of President Obama's advisors) argue that banks have to serve the public and the real economy and that global business often leads to conflicts of interest. Opponents of this idea, particularly in Europe, argue that the development of the financial markets makes it impossible to neatly hive off the two types of banking; doing both types of banking is a strength because the one compensates for the other in times of crisis; and a diverse range of business gives banks advantages in terms of market intelligence. They argue that there are synergies these days between the two types of banking and this gives clients a fuller range of services, cutting costs and therefore cutting prices for customers. According to this school of thought, investment banking is not just about speculation and it is purely speculative banking that should be separated off.
An open debate. In trying to set out the arguments on both sides, I have only one thing in mind - providing facts to feed a genuinely open debate. I believe it is in the interest of everyone with powers and responsibilities in this field to be aware of both sides of the argument. This is particularly the case for MEPs, who will be debating in public and must avoid a simple clash of fixed opinions dictated by their party line. The majority should win people over in proper debate rather than just voting them down - and the opposition should avoid demagogy. (F.R./transl.fl)