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 Useful advice offered on the day Goldman Sachs announced executive bonuses.
"But the banks are made of marble with a guard at every door and the vaults are stuffed with silver that we have sweated for." song by Pete Seeger
Financial crisis in the United States and the United Kingdom demonstrated that the banking system is in severe, immediate need of fundamental reform. The reform of banks would be to correct three glaring problems: 1) their potential to provoke global instability, 2) their failure to fund productive activities, and 3) their pernicious political power.
The first would the easiest problem to solve, for example, by an enhanced version of the proposal by former Federal Reserve chairman Paul Volker for the Obama administration. The original proposal would prohibit proprietary trading by institutions covered by federal deposit insurance and allow no financial entity with more than US$ 300 billion. If a levy on transactions ("Tobin tax") were added along with stricter oversight and regulation, an acceptable level of financial stability would result.
These changes would do little to induce banks to lend for productive projects rather funding the more lucrative property speculation, mergers and acquisitions. This predilection for the quick and unproductive is made all the more difficult to alter by how corporations raise capital. Instead of borrowing from banks, non-financial corporations in the US and the UK have increasingly shifted to "securitisation", in which bonds are issued backed by assets of the corporation other than plant and equipment.
Thus, the fundamental problem is not that the current recession has temporarily lowered the profitability of non-financial enterprises, large or small, but that even in the best times banks prefer fast turnover lending, and the largest corporations provide much of their own funding. It should be possible alter this situation with a combination of restrictions on securitisation and property dealing with tax incentives. However, it would require quite complex regulation and close monitoring.
The third problem, the political power of financial capital, is the most difficult to confront through regulation, not least because the regulated have the power to control the regulators. In his 1938 address to the US Congress, Franklin D Roosevelt warned:
Unhappy events…have retaught us a simple truth about the liberty of a democratic people…A democracy is not safe if the people tolerate the growth of private power to a point where it comes stronger than their democratic state itself.
The danger Roosevelt warned against, and in the next sentence called "the essence of fascism", has come to pass when the major preoccupation about the fiscal deficit is the response of so-called financial markets. These putatively impersonal "markets" are in reality "private power stronger than the democratic state". When democratically elected governments most base their fiscal and monetary policy decisions on the demands of a few people in financial institutions rather than on the electorate, fundamental reform is urgently required.
An obvious solution to the technical problems (financial instability and unproductive lending) would be to resolve the political problem (bank power) through nationalisation of the central institutions of the financial system. This is not as radical as it might seem. The Atlee government was accused of radicalism for nationalising the Bank of England in 1946, and today a proposal for a private central bank would be considered absurd. An analogous type of operational independence to that granted the Bank of England in 1997 would be allowed for the publicly owned financial system, which would be democratically accountable. In rendering unto the people the power of finance, a major step would be towards what Keynes in Essays in Persuasion (1931) called a "great change in the code of morals":
The love of money as a possession…will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease ...
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