First posted on Left Foot Forward
The Vickers Commission’s Interim Report on Banking is a huge missed opportunity; a betrayal, some might say. The report acknowledges the vast scale of the liabilities of the British banking system – private liabilities which at 450% of UK GDP eclipse Britain’s public debts of just 58% of GDP.
As Peter Boone and Simon Johnson wrote in the Daily Telegraph, these liabilities:
“…constitute a time bomb with the potential to create mass financial devastation.”
The Vickers Commission has so far recommended little to defuse these explosive devices.
We should not be surprised at their failure to act as an effective bomb disposal unit. Government, focused almost exclusively on the far lesser threat of public sector debt, has drawn their remit very tightly.
The commission’s terms are simply “to promote financial stability and competition”. To reinforce these limited aims, the government appointed two ex-bankers, and a competition economist – micro-economists all – and only one macroeconomist, Martin Wolf; the commission chair, Sir John Vickers, obtained his PhD in “Patent Races and Market Structure”.
As a result there is little attention in the report to historical context; nor does it explain the vast expansion of the finance sector since 1971 when Chancellor Anthony Barber first de-regulated finance under the guise of ‘Competition and Credit Control’ (dubbed ‘all competition and no control’ by economists).
Forty years of systematic de-regulation has inflated the banking sector’s “total balance sheet to more than four times (the UK’s) annual GDP”, according to the commission. Simultaneously, and because of the finance sector’s unrestrained usury, greed and speculation, Britain’s productive, manufacturing and agricultural sectors have systematically shrunk as a share of GDP.
One big disappointment is that commissioners and their advisers appear to lack a grounding in monetary theory. There is little evidence in the report of an understanding of the private (and shadow) banking system’s role in credit-creation, in fixing the ‘price’ of borrowing (the rate of interest) and in allocating credit.
Instead, commissioners treat credit as they would gas, or oil, tomatoes or corn – and dutifully attempt to promote competition in the supply of what Karl Polanyi once defined as a ‘false commodity’. They paint a quaint and antiquated picture of a banking system that uses:
“…funds deposited with them to provide loans to businesses to allow them to undertake productive economic activities, and also to consumers.” – Para 2.8 of the report
Competition, it is assumed, will ensure the fairer and more efficient allocation of customer deposits amongst firms and consumers. In other words, the commission ignores the existence of bank money, and the inter-relationships of bank money and credit and simply circumvents the role of credit in the economy – at a time when private sector credit/debts vastly exceed deposits in banks.
This is a fundamental flaw in analysis and approach, and dooms the commission to obscurity.
Of much greater concern is the role the commission will play in dooming the British economy, and the British people, to yet another financial crisis, and prolonged economic failure and suffering.