Saving banking from the bankers
Published: April 11 2008 19:59 | Last updated: April 11 2008 19:59
This week the world’s leading banks – represented by the Institute of International Finance – concurred with a conclusion long ago reached by the rest of the world: they screwed up, the credit crisis is largely their fault, and everybody else is suffering for their errors. The admission may not be enough to prevent a dangerous backlash.
Bankers may have realised, too late, the dangers of the banker caricature many people now believe. The popular perception is of an industry populated by clever crooks who manufactured toxic derivatives of subprime loans, repackaged them to look succulent, and sold them to greedy fools.
The truth is that, while there clearly have been fraudulent practices, the banking industry itself retained much of the risk from the subprime debacle. After all, if it had successfully passed on the bad loans, the banking industry would not be reporting titanic losses.
But most people are looking not at the banks’ losses but at the bankers’ gains. They have noticed that when the music stopped – as Chuck Prince might have put it – some of the dance partners left the floor with their pockets stuffed with cash, while others went home to lock up the houses they no longer owned and post the keys back to the bankers. Ordinary citizens, far from any subprime loan, have found themselves asking whether their savings are safe, why it is suddenly so hard to get a mortgage, and why the stock market numbers keep flashing red.
Politicians have noticed too, and invited Mr Prince and other former Wall Street titans to enjoy the privilege of having strips torn off them by a congressional committee.
By accepting much of the blame and proposing various measures to get its house in order, the banking industry hopes to avoid further regulation. It will not succeed. The political atmosphere has become too febrile for that: the mob is at the gates baying for justice.
Still, the bankers’ initiative may blunt a few pitchforks and snuff out a blazing torch or two. By engaging in the debate at this point, they may help to shape a wiser regulatory response, one that aims to bolster smoothly functioning markets rather than bulldoze them and build a bureaucratic edifice on their remains.
We are asking a great deal of governments. It will be hard enough to deal with perverse incentives and hidden information in financial markets; such problems can be addressed but never fully solved.
Yet governments now face a deeper challenge: to make a principled stand for free markets, appropriately supported. It is not just the credit crisis. Popular fears of globalisation, discontent with high oil and food prices, rising income inequality within nations – all have contributed to an uncertain time for capitalism. The capitalists have certainly not helped.