Bankers may face period of opprobrium, but the world still needs them
If history ended on November 9, 1989, when the Berlin Wall fell, it returned with a vengeance on the week starting September 14, 2008, when Lehman Brothers filed for bankruptcy, Merrill Lynch rushed into the arms of Bank of America and one of the world’s largest insurers, AIG, was effectively nationalised by the US government.
In the UK, competition policy was thrown to one side to allow Lloyds TSB to rescue HBOS from the ravages of the market.
These seismic events have implications far beyond the world of banking. Laissez faire capitalism as an ideology is badly wounded and its challengers have all the ammunition they need to take it on. Whereas the trend of the past two decades has been that of interventionist governments pulling back and allowing market forces a freer reign, the next two decades may be characterised by the opposite – the return of dirigisme with governments regaining a thirst for public ownership in extreme cases or, at least and more likely, a stronger mandate for regulation and control.
The outcomes in prospect will be as different as the political systems that followed the collapse of communism. While Francis Fukuyama’s ‘end of history’ thesis argued that liberal democracy was now the ultimate form of government, the reality was of varying political systems, including authoritarian regimes and one-party states.
The global financial crisis will give rise to similarly different responses, depending on which groups of politicians gain the upper hand in the months ahead and the arguments that are laid before them.
Drastic measures
At the level of ideas, almost everything is being discussed from nationalisation of stricken banks to the resurrection of Glass Steagall (the 1933 US legislation that separated investment and commercial banking among other things) to the canning of Basel. Rating agencies are under attack as is mark to market accounting, the role of securitisation and bankers’ compensation.
The crisis, and the rethink it has engendered, comes at a particularly apposite time. In the US, the presidential election is a more ideological one than has been fought in a long while. Whereas it used to be in western Europe that political parties were starkly divided, the world’s most interesting ideological debate is now taking place in the US.
The US is a divided country with fiercely competing views on social and cultural issues. Throw economics into the pot and the next US president could set the stage for a very different kind of financial system than the one the country has had up until now. Even without this added political dimension, Congress will want to exact revenge for banking misdemeanours and a 2009 equivalent of Glass Steagall or Sarbanes-Oxley is on the cards.
Sense of proportion
Should bankers fear this? Not as much as they think. Excluding the more extreme outcomes, such as nationalisation (although even state-owned banks need bankers and banking expertise, and state-owned banks from the BRICs – Brazil, Russia, India and China – are performing more than adequately), it is safe to say that the world still needs banks although their modus operandi may be different.
But then it is already changing as a result of the crisis anyway. The big work being done in banking is concerned with carbon emissions and other environmental schemes, with transaction services (always a staple of the system, and in greater demand during volatile periods), with bringing standard banking products to new consumers in the emerging world and with handling the longevity risks that arise from ageing populations in the developed world. These are all valuable services that will be needed in whatever financial and economic systems emerge from the crisis.
Bankers will have to endure some unpopularity during these calamitous times (it never was exactly the most admired profession). Some will lose their jobs, many more will just carry on doing the same old job as they always have. They may be paid differently.
Banking leaders and their representatives need to engage in the debate to minimise the likelihood of unpalatable outcomes (the Institute of International Finance has already embarked along this road).
Lying low
When the dust finally settles, it is certain that there will be important and valuable work to be done, possibly under new terms and conditions, but then dealing with regulation and government diktat has always been part of a banker’s lot. Bankers must accept the opprobrium now and not expect any thanks for dealing with the kinds of problems outlined above as they become even more pressing.
History is returning and its march has always favoured the brave. Now is the time for courage as the world goes through a period of turmoil followed by dramatic change.
