Get ready for another banking crash

The Bank of England’s Paul Tucker pulled no punches on the BBC last night. “When banks take the upside and taxpayers take the downside, something has gone wrong with the very heart of capitalism”, he said.

Tucker, deputy governor of the Bank, with special responsibility for financial stability, aimed his advice at the Coalition government. Instead of further government intervention to bail out banks, they should be allowed to fail, albeit in an orderly fashion.

Cameron, Clegg and Chancellor Osborne are anxiously awaiting the recommendations from the Banking Commission they established in June 2010, to look at the “size, scale and function” of the banking sector. But there’s no time to lose.

Tucker’s bite-the bullet proposal to let the likes of Lloyd’s and RBS fail – and presumably to take all their depositors’ money down with them, was delivered as the climax of the BBC’s business editor Robert Peston’s retelling of the story of rapid expansion of the financial sector that preceded the crash of 2007/8.

Tucker is saying that there’s another, much bigger crash on the way. This time the banks will be just too big to save.

Peston and the BBC’s media expertise took us once again through the breakdown of regulation and the rise of derivative financial “products” whose face value grew to be ten times larger than the total of the world’s annual production of goods and non-financial services.

But, as with most accounts, no underlying explanation was given for the exponential expansion of credit from the 1970s onwards. Apart from using Toby Baxendale, a wealthy fish merchant, to top and tail the hour-long programme, the real economy hardly got a look in.

Amongst Baxendale’s biggest customers was Lehman’s. When they cashed in their chips, Baxendale lost out. Now he’s got a sensible-sounding idea to end the madness – legislation to force banks to keep a customer’s deposits safe rather than lending them out, if that’s what the customer wants. We didn’t find out whether he expects to pay for the privilege, or wants to receive interest.

Either way it’s just a variant on the idea of returning to the days when savings banks had to be kept separate from the more risky lenders of capital for investment. The chances of that happening are less than zero.

This won’t solve the main problem. The banks are still stuck with monumental mountains of toxic assets. These are the unsustainable debts that can never be repaid, because repayment depends on recovery and there can’t be a recovery before the excess productive capacity they funded has been eliminated.

It has always been part of the BBC’s role to protect the state when danger threatens, and this was one of its better attempts to keep attention focussed on the banks, and away from the real heart of capitalist production – the place where real value is produced by people working, and working longer and harder than they need to satisfy all of our needs.

With students leading the campaign against the cuts, and beginning to widen their campaign beyond blaming the bankers, and the soaring price of fuel and food enraging the population, the state is beginning to come under attack. They can’t wait for the Banking Commission. Some might even smell a conspiracy of the Coalition, the BBC and the Bank of England to confuse the public, to keep the attention on the banks and away from the system as a whole.

Without the fairy tale expansion of credit and debt, the capitalist economy could not have continued to grow and profits and interest payments could not have continued to be extracted from the value the workers produced all over the world. But, as Tucker is saying to Cameron, it’s all over now, baby blue.

Gerry Gold
Economics editor