Bowler-hatted bankers

So that’s it. Not only has Britain propped up its banking system to the satisfaction of the markets (the FTSE is up 4.4% at the time of writing), it has conducted a dazzling master class in state intervention which the Eurozone and the US itself can only admire and strive in their way to emulate. Gordon Brown is saved – indeed, to quote one particularly effusive commentator, he can “stand tall” again.

OK, there are undercurrents of discontent: “Banks Nationalized”, claims the headline in The Times, while as in America there is grumbling resentment that the government is bailing out the rich at the expense of taxpayers and those reliant on incapacity and other state benefits. On the whole however the government is basking in the glow of a threefold achievement: saving the major banks in a form which promises to allow them to reassert their independence later; reassuring the middle class that their savings and (to a lesser extent) pensions will not disappear; and even titillating the old left with a flash of public ownership – goodness, the government may be taking voting shares in the banks it is rescuing!

Then there is the sheer daring of it all:  the flutter on the future health of the banking system is enormous – it is definitely down to the family silver, an unrepeatable gamble. Of course the fact that it has to work is one reason it is working. Even market traders know when to swallow their scepticism, for a day or two.

But none of this is really the point. The prime minister talks about protecting “hard-working families” and “small businesses”. It is as if the agriculture, motor manufacturing, chemical, drugs and oil industries – and many others – did not exist. The same point emerges from the constant repetition of the mantra that solving the credit crisis means “getting the banks to start lending to each other again”. And herein lies the issue the government really does not want to discuss.

What is the function of the banks? As we have been pointing out here for several weeks, it is not to lend “to each other”, but to allocate capital to the most productive uses. That means that we need to ask a double question –

• Why did the neoliberal approach to capital allocation so comprehensively fail (at the same time as vastly enriching its operatives, of course)? One answer is that to the markets “most productive” means “most immediately profitable in terms of share values”. On the trading floors the time frame became shorter and shorter, the risks greater and greater. Eventually dealers were punting on activities about which they knew almost nothing.

• The government itself now has to make judgments about what “most productive” means. The question is, what criteria will it adopt? Civil servants sitting on the boards of banks will have to do more than bear down on executive pay: they will have to make assessments of the social and environmental costs and benefits of the loans they approve.

The debate now, parliamentary and in the wider community, must be about how the government redefines “most productive”. The signs so far are that it hasn’t a clue, and doesn’t want to admit the existence of this unavoidable question.

Comments

[Umar Gul]

Thanks for great blog