The industry still prizes short-term profit over long-term prudence, today’s bonus over tomorrow’s relationship.
— Christine Lagarde, IMF Chief, May 27, 2014
Capitalism has always had an image problem. A public relations make-over had to be done of its rather dark image during the Cold War. The term “free enterprise” was preferred, giving the impression that accumulating capital and chasing it was a matter of initiative and creative impulse. With the end of the Cold War, the chest thumping began. De-regulation became de rigueur. The 1990s was the Greenspan-Clinton era, one where the very idea of institutional control over capitalist excesses was not merely to be frowned upon, but dismissed altogether. Accumulation became synonymous with creativity.
The City of London has been the focal point of such supposed creativity. When the bulging and burgeoning bubble burst towards the end of 2007, the City, with its bankers and traders, became the focal point of ire and consternation. Banks were socialised. Bailouts were arranged. Reforms were suggested and financial regulations imposed. Laws in Britain were passed increasing jail terms for up to seven years.
The industry has been less than enthusiastic. According to Christine Lagarde, managing director of the International Monetary Fund, “a fierce industry pushback” by the financial sector has retarded the drive to reform. Instability remains. Financial misconduct continues. “Some prominent firms have been mired in scandals that violate the most basic ethical norms.” Listening to Lagarde at the inclusive capitalism conference in London, one might think that even the term “reform” might have been far-fetched, given that the industry had “not changed fundamentally in a number of dimensions since the crisis.”
In a broad sense, Lagarde was meditating on the subject of “inclusive capitalism” as problematic. When the chief of the IMF, an organisation often brutal in its account keeping, ponders such terms, something is moving about in the waters. “So is ‘inclusive capitalism’ an oxymoron? Or is it the response to Marx’s dire prediction that will lead to capitalism’s survival and regeneration – to make it truly the engine for shared prosperity?”
Sharing such wealth has hardly been on the cards of modern capitalism, with its “risk-taking, leverage, opacity, complexity, and compensation.” Leaders of financial institutions are simply not trusted. The only way capitalism is to survive, suggests Lagarde in a somewhat oblique way, is to have that trust restored, reviving opportunity, distributing “rewards for all within a market economy – allowing everyone’s talents to flourish.”
The Bank of England’s governor, Mike Carney, was in agreement. Speaking at the same conference, he argued that the social contract was being subjected to a sustained battering by the unscrupulous pursuit of profit. “When combined with the longer-term pressures of globalisation and technology on the basic social contract, an unstable dynamic of declining trust in the financial system and growing exclusivity of capitalism threatens.”
Financial regulators have certainly found their hands full. Last month alone, EU anti-trust regulators fined Goldman Sachs and a host of cable firms €302 million for running a cartel. The cartel itself had been running since 1999.
Banks such as HSBC, JPMorgan and Crédit Agricole deny manipulating the Euribor interest rate, the vital interest rate benchmark for lending in euros. Besides, what do those at the EU Commission really have to worry about?
Judging from the current record, quite a lot. Last year, Barclays, Royal Bank of Scotland (RBS), Deutsche Bank and Société Générale were implicated in a cartel to affect the prices of interest rate derivatives. The fine levied there was €1.04 billion. Again, the response was one of denial by those who had been found with their fingers in the cookie jar.
The solution, argued Carney, was the restructuring of markets, and the clarification of responsibility between senior members associated with those markets. A jail filled with reckless bankers would only offer some cold comfort, but hardly pose a deterrent or boost public confidence. “Merely prosecuting the guilty to the full extent of the law will not be sufficient to address the issues raised.”
Bank representatives prefer to muffle such suggestions, claiming that there have been, in the words of Rob Nichols, head of the Financial Services Forum, “fundamental and far-reaching improvements – both government mandates and industry initiated” since 2009.
Carney certainly has a battle on his hands. Individuals such as Jamie Dimon, chief executive of JPMorgan, regards financial regulation as something bordering on “anti-American.” Dimon, in fact, is the sort of person who argues that CEOs in his position deserve huge pay rises even as his bank is fined. This prompted Matt Taibbi in Rolling Stone to suggest that, “If you make a big show of punishing someone, and when you’re done they still don’t think they have a behaviour problem, you probably picked the wrong punishment.”
Therein lies the problem. Capitalism, far from being inclusive, tends to find itself being practiced by those who believe in its distinct exclusivity. The banking sector has made this a primary pursuit, laying off employees by the thousands while lining the pockets of Dimon et al. Without assumptions of accountability, reform will be a mere sentiment.