Barclays Capital was fined by financial regulators in the UK and the US last week. But the rot goes much deeper than this. Left-wing economist James Meadway explains what’s wrong with the financial system
Barclays was fined after admitting attempting to rig the London Interbank Offered Rate (Libor), a measure of how much it costs banks to borrow from each other.
Libor is calculated by taking an average – each morning - of the rate that banks report they can borrow at. Sixteen banks report to Libor - and Barclays is one of them. Libor is overseen by the British Bankers’ Association, the banks’ trade association.
Banks continually lend and borrow from each other, as part of how they manage their own finances. The rate at which they can do this will vary depending on how secure the bank is perceived to be. Libor is intended to act as an indicator for how the bank lending market as a whole is behaving. It is taken as a guide by trillions of pounds’ worth of financial contracts, from complex derivatives to mortgages on homes.
Because the value of these contracts depends on the value reported by Libor, very large sums of money can change hands when Libor moves. Some of these contracts are held by the banks that report rates to Libor.
Libor’s accuracy depends on the accuracy of banks’ reporting of their own borrowing rates. Barclays has admitted, before the crisis of 2007-8, to over-reporting its borrowing costs, and then, during the crisis, to under-reporting. Before the crisis, it was over-reporting because it had financial contracts that depended on a high Libor value. During the crisis, it under-reported its borrowing costs to disguise how weak it really was.
This is not due to a few rogue traders, as Barclays’ initially claimed. On the evidence presented, the corruption of the Libor reporting system was rampant at Barclays and it stretches credulity to think that senior management was unaware of this.
This is not even due to one uniquely bad bank. Perhaps the most damning single part in the trails of emails is the offer of a “bottle of Bollinger” by a trader outside Barclays to a rate submitter inside Barclays for help in rigging Libor. And it’s not the champagne that condemns; it’s the collusion, spread across banks. Rate-fixing is endemic to British finance.
It is endemic because Libor is a racket, and always has been. It requires banks to accurately report their borrowing costs to their own lobbying group – and to do so when they have financial incentives to report inaccurately.
With the best will in the world – perhaps if British banks were run by financial paragons of virtue – they would find accuracy a challenge. As things stand, asking them to run Libor is like putting Augustus Gloop in charge of the sweet shop.
The latest scandal follows a familiar pattern. Some hitherto unimagined – but all too obvious - moral transgression is revealed in one or more of the banks. A circus of denunciation sets in train, from Guardian leaders to Tory backbenchers. A few recidivist senior bankers are pilloried. One or more ministers – Vince Cable being the preferred choice – start making noises about the need for urgent reform.
And then precisely nothing happens. The City remains as it was, perhaps minus a sacrificial offering or two – Fred Goodwin’s knighthood, or Bob Diamond’s bonus. All the corruption, greed and squalor remains. As former Bank of England governor Mongtu Norman was wont to remark: the dogs bark, but the caravan moves on.
With every turn of this cycle, the filth of the City becomes more – not less – ingrained. The solutions from official politics grow more – not less - feeble: Ed Miliband proposes a public inquiry a few months after the last inquiry, the Vickers Commission, came to its own insipid conclusions (and mere weeks after the Coalition government proposed to water them down still further).
Cable harrumphs loudly about the “moral quagmire of almost Biblical proportions” – and then proposes a different public inquiry, along with the pious hope that enough “decent people” are now coming into banking to drive out the (presumably) indecent.
Not “culture”, but a system
This last hope is risibly pathetic. The fault in the financial system is not that it is run by uniquely unpleasant people, or that it promotes a culture of greed and deceit. This much is obvious. But the vile morality of the City is the unpleasant effluent produced by its workings.
The fault of the financial system is that it is a financial system, and one, in the UK, of a singularly unrestrained stripe. This is capitalism, red in tooth and claw. It is the direct product of decades, now, of deregulation – and, indeed, direct encouragement – by successive governments. They allowed finance to slip the leash in the belief that it would lead a transformation of the British economy.
Longstanding weaknesses - present, ultimately, since the late nineteenth century - would be flushed away. Neoliberalism, the unbounded belief in the superiority of markets, meant unremitting support for what appeared to be, by the late 1990s, British capitalism’s remaining historic strength.
As the crisis of 2007-8 revealed, this was profoundly mistaken, even on its own terms. Maintaining a deregulated, offshore financial colony has proved enormously costly for the economy as a whole, perhaps most graphically revealed by the sheer scale of the bailouts enacted after the crash of late 2008.
£289bn was made available in immediate support for the banks, backed up by over £1,000bn of indirect promises of support. This is overwhelmingly larger than the £193bn taken in tax revenues from the financial sector over the boom years. The City of London is a parasite.
It is also weak. Quantitative easing – the shovelling of electronic money into banks’ reserves by the Bank of England – has helped Britain’s fragile financial institutions steady themselves, post-crash. But they remain, to all intents and purposes, the same institutions following the same priorities as they were before 2008 – even when they are, like RBS, largely owned by the state itself.
Their willingness to extend loans to ordinary consumers and small businesses has certainly diminished since then. Their willingness to indulge in sharp practices and financial chicanery amongst themselves has not. And because they have extended themselves so gloriously, they remain highly exposed to risks across the rest of the world.
This financial weakness, however, has become a source of political strength. “Too big to fail” means precisely that fundamentally weak institutions can, by threatening collapse, depend on ever-ready state support.
Throw in the immense historic and institutional resources of the financial sector – from the Corporation of the City of London, to its pet ministry, the Treasury, to its brute lobbying capacity – and the weight of its influence in British political life is all too obvious. Within a British capitalism that is notably weak compared to its competitors, finance is by some distance the dominant fraction.
That dominance is now clearly acting contrary to the wider interests of capital. Finance’s desire – and ability – to accrue profits for itself is threatening the stability of British capitalism as a whole. As neoliberal commentator Martin Woolf argues, “such behaviour is incompatible with the survival of a sophisticated market economy”. Rate-fixing is symptomatic of a system that is beginning to devour itself.
A government simply committed to the defence of the interests of British capital might, at this point, intervene against finance. Even so, it would find the challenges formidable. Our weak, feeble Coalition government won’t even go that far. Its plans for “reforms” are joke, from the farce of Operation Merlin, to its response to Vickers.
But the Opposition is scarcely better. New Labour fell for the myth of a finance-led economy perhaps even more thoroughly than did the Tories. And today no Labour frontbencher can be found who will make substantive proposals to challenge the strength of finance. Official politics, whether Labour, Tory or Lib Dem, is in logjam.
A developing crisis
However, the situation may be slipping beyond their immediate control. The evidence presented by regulators has found that the Bank of England could plausibly have known about Barclays’ rate-fixing as far back as October 2008. It may have gone even further. Part of Barclays’ defence of its own actions is that it “mistakenly” believed - following a discussion between Bob Diamond and Paul Tucker, deputy governor of the Bank of England - that it was allowed to submit inaccurate reports to Libor. The content of this conversation is not yet clear, but calls for an investigation are growing.
This brings the crisis, potentially, to a more dangerous point. Transgressions by one or even a few private banks are one thing. But for the central bank to become embroiled is quite another.
The Bank of England is supposed to oversee and manage private banks; indeed, it has recently been granted wider powers to do so. Its functioning is critical to the whole system. If it, too, is under scrutiny, the whole system becomes exposed.
Like the phone-hacking scandal over last summer, to which this bears a more than a passing resemblance, a new, more unrestrained political dynamic can set in train when the scale of the corruption becomes apparent. It remains to be seen how far the Bank of England can dodge questioning, and how far it can present itself as an innocent bystander – implausible as this may seem. But its involvement raises the possibility of wider demands for the transformation of finance.
Another – yet another - official inquiry will not be remotely adequate, although Osborne will be hoping to stymie the crisis through it. A programme seriously intent on cleansing the Augean stables of British finance would certainly look to prosecute where needed, just as Iceland has done.
But it would also nationalise banks, clear out existing managements, and place them under democratic control, with clear mandates for public investment. It would clamp down on tax avoidance and tighten up taxes on wealth.
That won’t emerge from inside official politics. But a mass movement from the outside, in opposition to the austerity the bankers demand, could start to break it. That movement, drawing in all those opposed to spending cuts with trade unions at its heart, remains to be built. The TUC’s national demonstration against austerity on 20 October is critical to building it.
Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).