Too big to regulate

Two years after the global financial system imploded, the world’s central banks and regulators have agreed a set of measures intended to prevent a repeat performance. There are, however, more than just a few flies in the ointment.

The measures agreed are really quite simple. They require banks to double to 4.5% the ratio of capital held in reserve to meet losses of “risk-weighted assets”. Banks that fail to meet the basic provisions will not be allowed to pay dividends.

The accord reached in Basel is supposed to “ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth.”

In response to fears that the impact of introducing the tighter controls could themselves trigger new crises, the new limits will be phased in over a period up to 2019, much to the relief of the speculators on the global markets which marked bank shares up on the news.

In its simplest terms, the assumption underlying the new regulations is that they will stabilise the financial sector. This would allow enough time for the global capitalist economy to recover its growth trajectory.

There are, however, more than just a few flaws in the accord, and the most obvious is admitted by the official press release, which says: “Systemically important banks should have loss absorbing capacity beyond the standards announced today.”

Put another way, the influence of some very large banks has become so great that it puts them beyond the powers of regulation. According to the Forbes 500 list, the top eight corporations in the world measured by their assets are all banks: BNP Paribas, HSBC, Bank of America, JP Morgan Chase, Banco Santander, ICBC, Wells Fargo and the China Construction Bank.

Their towering “assets” are, in fact, accumulated debt and it’s a burden that is taking its toll around the world in terms of job losses, cuts to pensions, destruction of public services and lower living standards.


The creation of these behemoths was a necessary consequence of keeping capitalist growth on track during the globalisation decades. Then, the volume of credit and the velocity of its flow around the spreading networks grew much faster than the production of commodities. Regulation was relaxed and then eliminated; new forms of credit were created that circumvented whatever controls remained; and financial markets beyond the reach of regulation are continuing to expand.

Towards the end it seemed – to many – as though the world of credit had taken to the air on a hugely profitable life of its own separated from the hard reality of the world below. The crash of 2008 proved them wrong. Now the majority are paying the price as the surplus capacity which resulted from an orgy of debt-financed investment and consumption is swept away.

Alongside the restoration of credit controls, indebted governments are hard at work ensuring that anything that hasn’t already been turned over to the for-profit sector will be. In Britain, the Lib-Tory coalition is restructuring the state to abandon responsibility for key services like health and education while cutting benefits to the bone.

Many of those still in work are already discovering the impact of sharpening global competition. For the generation now leaving college, the only hope is for a period of unpaid internship, or work experience to add to the CV. In China, before even completing their studies, hundreds of thousands of college students are being redirected to work for nothing in shiny new factories.

Protests, strikes, resistance or mass campaigns of civil disobedience, can all play a role in highlighting the need to go beyond the existing economic, social and political system. But new, permanent democratic forums must be developed to challenge and replace the existing state. In this way, we can create the conditions for ending once and for all the self-destructive capitalist financial and economic system.

Gerry Gold
Economics editor

Banks star in the 'Great Escape'

When President Obama informed the White House press corps yesterday that he would shortly sign into law a package of measures that would ensure that the financial collapse of 2008 could not happen again, he was promising something he could not possibly deliver.

Congress has created a compromise bill that is so cumbersome that many critics see it as unworkable; it has nothing to say on “leverage” or borrowing to fund speculation; plans to break up big banks are on the back burner; and the United States has no international agreement on its approach.

In the meantime, the conditions that gave rise to the global financial crash of 2008 remain very much in place, with warnings that a new bubble is ready to burst. The system remains weighed down by debt at every level – financial, state and household.

Congress has created more than 2,300 pages of new regulations, which will be supplemented by more than 250 rule-making interpretations. Words and no teeth, according to investment adviser Terry Savage, who says: “Yet when it came to the basics, like requiring brokers to act as ‘fiduciaries’ – putting their client's interests ahead of their own and fully disclosing any conflicts – this simple act was consigned to a ‘study group”. And when it came to prohibiting the banks' risky activities … the law will take as long as 10 years to fully go into effect.”

Even the Financial Times views the new legislation as relatively harmless. Senior writer John Authers, whose new book is a gripping tale called The fearful rise of markets, writes: “After the financial crisis, it was beyond argument that existing regulations had failed, and would need to be rethought. Only a few months ago, it looked as though the Great Re-regulation might turn into a Great Revenge, as politicians planned to squeeze the banks. Now, for the banks it begins to look like a Great Escape.”

First Goldman Sachs was fined just $550 million for betting against itself with no admission of guilt. This is just three days’ revenue for the investment bank and reflects the power of Goldman Sachs, whose former employees include the treasury secretary Timothy Geithner.

Authers, whose book warns that the rise in markets in the last year has no connection with reality, admits that the bill Obama is about to sign does not tackle the “central issue of leverage”, through which banks and others borrowed to multiply many times over the effect of their investments – and their eventual losses.

His concern at the political failure is barely disguised: “Having toyed with going too far, politicians and regulators have not gone far enough in the needed re-regulation. That is worrying for the long-term health of the financial system, but good for shareholders in financial stocks.”

Meanwhile, at a global level the story is more or less the same. The Bank for International Settlements (BIS) is drafting new rules about the levels of capital that banks should have. But all the indications are that attempts to raise thresholds to curb excessive and speculative lending will be omitted when the BIS publishes its proposals later this year.

The moral of the story is this: politicians can huff and puff all they want and play to the public gallery over the banks. But when it comes to the crunch, the capitalist state is under the thumb of financial markets that have a compelling logic, life and power of their own as Greece, Ireland and Spain have already found out. Despite bailing out the banks, he who pays the piper does not, in this case, call the tune.

Paul Feldman

Communications editor