The rules of the game must change for Banks

Banks are crucial to the proper functioning of a capitalist economy and must therefore be treated differently to other businesses. If a bank is too big to fall it must surrender some of its freedom to operate in the free-market and expose it self to much more stringent regulatory control and government interference (unfortunately)....otherwise the whole system can fall again!

The article which appeared in the Financial Times entitled 'Lending in Europe continues to shrink' (13 September 2009) highlights a debate which is ragging post-2008-financial-crisis: should the banks deleverage so as to address the systemic risk of the financial crisis it self and help avoid it happening again or opt to increase lending so as to help kick-start the global economy back into growth. 

 

I think averting a World Great Depression in 2008/2009, with the coming together of the G-20 and the economics of quantitative easing, was the easy bit (so to speak), the difficult bit now is to come out of the global financial crisis and recession with a banking system that is responsible in its lending yet at the same time aware that their prudent new approach could be part of the very reason for the delayed / disjointed recovery.

 

To arrive at the answer one has to clearly consider and decide who the owners of the banks should be given their 'too big to fall' role in the economy. Should banks be privately owned / controlled or publicly owned? At the moment everything is a bit fuzzy: Lloyd's TSB or RBS, for example, are being propped up with tax payers' money but apparently this is just a temporary situation given the extraordinary once-in-a-century circumstances. Presumbly, therefore, they will soon return back to their natural habitat and operate as capitalist operators in the global free market as private operators. Yet the landscape is set to change, especially with the FSA being given more regulatory control and banking-as-we-know-it set to change irrevocably. 

 

With this having been said should banks be treated of such strategic importance to national economic wellbeing that they must always have a Master (the Government backed by the taxpayers)? The prevailing view since 1945 has been that the free-market should not be controlled or restrained too much by the Government and that the market is always right. But surely we have gone full-circle on this argument in which too much freedom leads to a reckless / irresponsible banking system which can literally bring down the whole system to its knees if not outright kill it! 

 

I suspect that the answer lies in the powers that be to reconceptualise the idea of free-market economics. In this case, the banks that are 'too-big-to-fall' must bow their heads to regulatory / government control for the 'general good' of all the other free-market players operating in the free market. There are other freemarket operators that will benefit from the free-market and continue to prove that capitalism is the best option for the world economy but I suspect, and after the recent crisis, that banks' freedom must scarificed or curtailed for the good of the whole capitalist system.

 

 

 

 

This author consults with leading institutions through GLG