In the past five years it has been impossible not to repeat the same message about fixing the faults that brought the financial crisis. Yet, no progress has been made, and the flaws that caused the most significant structural crisis of modern history are still looming around like the stroke of midnight in a horror movie. The whole reaction has been to fight fires without addressing their causes while the core problems have not been addressed.
It must be clear to all that the consequences of oligopolies are, naturally: market manipulations, excessive and unjustified level of compensation, fraud, mis-selling scandals, mistreatment of customers and suppliers, criminal activities, uncalculated risky activities, and a whole array of uncompetitive behaviors.
However, here we are again with smoke and mirrors. Forcing Barclays Bob Diamond and Marcus Augius to resign are illusionist’s games; attempts to pacify the public by identifying the culprits as a few individuals. Many other banks violated the same laws, many more professionals were involved. Justice comes too late and really too little. Even though the damages are of enormous economic dimensions, no jail sentences are likely to be brought. And how about those governments or public officials that, thanks to the heavy lobbying of the banks, covered it up, slowed and prevented the course of justice?
The only real facts are the trillions of public money already spent to save the banks and the continuing government guarantee to monolith unmanageable institutions and other disproportionate oligopolies now bigger than before. This is an insurmountable barrier to a real free market economy and to any chance of a recovery. Socializing losses and privatizing illicit profits is destroying our societies. The rescue money did not go into productive activities. Real enterprises are cut off from the capital needed to prosper and from the conditions that allow them to deploy capital in productive ways.
As suggested by former FED Chairman Paul Volcker, the remedy to resolve this Moral Hazard is simple.
Briefly, some banks and other enterprises have been allowed to reach such a big size, to become oligopolies, and to perform activities with such conflict of interests, that they can manipulate and corner markets, influence governments, and behave uncompetitively. They blackmail society because their failure (so they say) would jeopardise the entire system. These entities refuse to compete, act as cartels, are allowed to defy the gravity of capitalism and its free market rules, and enjoy an implicit rescue guarantee from governments that with taxpayer’s money are ready to intervene to prevent failures. The largest public rescue has already taken place. As Bank of England Governor Mervyn King stated recalling a phrase from Winston Churchill, “Never, in the field of financial endeavour, has so much money been owed by so few to so many”. Without the rescue and the promise of an unlimited guarantee, few banks would have survived the crisis.
The situation is now worsened by widespread spending cuts imposed upon most of Europe, which are mainly affecting those who underwrote the rescue of the banks, and forcing some countries into disarray and gridlock. These measures further depress consumer spending, and the overall level of demand, which would instead ignite the possibility of recovery. Making one part of society (or some weaker country, e.g. Greece) bear the costs will not avoid a further crisis, but rather the opposite and generate deep social unrest. Therefore, the “fortune bonuses” in spite of disastrous results, the market manipulation frauds, the mis-selling scandals, all continue to add insult to injury. Simple resignations are not enough and create further confusion and uncertainty. Horse-trading will not help, “pay as you go politics” are a shambles, and while the founding fathers of modern free markets and democracy are turning in their graves, we should not be in psychological denial; and still hope that the “efficient markets hypothesis” will automatically fix things.
The continuation of emergency behaviors that frantically followed suit since the crisis began calls for action now. We have seen more oligopolistic consolidations, higher risk concentration and wider conflicts of interest, greater moral hazards, more misalignment and tensions between corporate management, shareholders and the public, and an increase in the general level of corruption. All of this further depresses markets and the willingness to invest into the real economy.
As clearly indicated by Mr. Paul Volcker, it is now necessary to break up the banking activities, thereby promoting a proliferation of players, re-establishing partnerships, unbundling oligopolistic concentrations, and perhaps the best reward of all, promoting managers to become real owners. In fact, nobody cares for an asset better than its owner.
The financial services business is malfunctioning and failing to perform the fundamental role of support to the real economy and society. There are no economies of scale that justify such dimensions and concentration of functions,conflict of interests, and the implicit public guarantee.
The breakup of the financial activities would instead unleash huge value in the financial and industrial world. It would bring back the “skin in the game”, that ownership/responsibility element, that is so important to any human activity. It will make taking calculated risks and receiving proper rewards sound and possible. This will also enable a restart to lending activities and capital access for Small and Medium Enterprises, an absolute key to any feasible recovery. The latter should be the paramount focus of any western government.
Failing to resolve this issue will only deteriorate matters. An oligopolistic totalitarian world will only bring distortions and misery. Europe is in a state of confusion, gambling with its future and, the economy is anemic and with several real systemic risks about to bust. Consumer confidence and trust are at a minimum and the general feeling is that of fear and mistrust. The lobbying pressure from a small but powerful group makes the entire West incapable of moving forward: “They are fiddling while Rome burns”.
Yet, this can be changed if we fix the structural flaws, generating a virtuous cycle of consumer spending and a rebalancing of public finances. The immediate thing to do is to break up the banks’ oligopoly. A proliferation of financial players should be promoted (with much benefit for London, the UK and all major financial centers) and the same should be favored in all sectors of economic activity, re-establishing partnerships. This would go to stimulate the growth of the pivotal medium size firms. The latter should be favoured and be the direct investment focus of long-term institutions, and capital rich companies which should receive fiscal incentives to enable long-term investments. It would create a new flow of capital to the real economy and a new sustainable investment management practice.
How else will the huge public deficits be repaid?
This is the time for leadership beyond the boundaries of party politics and it is an opportunity to make a mark on history. Repeating what needs to be done is worthless. Doing it, is what counts.