Monday, March 19, 2012

STATE CAPTURE by the Financial Services Industry

State Capture is generally associated with Corrupt Countries where a small number of firms (or such entities as the military) are able to shape the rules of the game to their advantage through massive illicit, and non-transparent provision of private benefits to officials and politicians. Examples of such behaviour include the ability to control legislative votes, to obtain favourable executive decrees and court decisions. A new phynomena of "State Capture" where "Too Big to Fail Financial Institutions" dictate economic policy is now evolving since the onset of the Financial Crisis in 2008.

The UK economy has now been infiltrated and hijacked by a self serving group of Bankers and Financiers who have no regard in re-distributing wealth to the many for the overall good of the country, but seek to engross themselves at the expense of Civil Society. This cannot continue and the Financial Industry can no longer hold the UK to ransom. Go back in history and the Great Depression is eerily similar, but Banks were allowed to fail in the Great Depression. 100 years ago Bank Executives were held personally liable for a Bank's failure, now they walk away with Golden Handshakes. Many economists claim that Bank failures caused the Great Depression to be so prolonged and deep and the Federal Reserve allowed the money supply to contract so sharply. I disagree with this analysis and suggest as Hayek does that Banks should be allowed to fail. However I suggest to significantly reduce the impact of a falling money supply when Banks are placed into Insolvency and Depositors withdraw their savings that Bank Savings Deposits should only be protected in any form of Bank Insolvency and immediately  new "Good Banks" without the legacy of "Toxic Assets," be Incorporated with  local community people taking over the governance of these new entities. Financial Elites would loose in such a scenario given the fact that over recent years Share Bonuses have been given on top of monetary bonuses. The so called "Fire Wall" should only protect Bank Saving Deposits held by a Bank that at best now comprises in most cases less than 10% of a Banks Balance Sheet. In the current Financial Crisis if you had forgotten, goes back to 2007, now coming on 4-5 years and we do not seem any closer to solving the fundamental economic problems, so it needs a total re-think. Top Bank staff even now in 2012 are still rewarding themselves handsomely for Failure and the 99% have had enough. Yes Prime Minister we are not all in it together. Financial Institutions who have been bailed out by the State should be considered as "BENEFIT SCROUNGERS," and should not be considered as "Folk Heroes." Giving them now a third chance after 4 years since 2008 to pull the economy out of The Abyss when everyone else suffers is totally unacceptable. The economy simply will not recover when the wealth of a country is so highly concentrated in the hands of a few, who were bailed out in 2008 and continue to squander the countries wealth at the expense of everyone else.

The calls for Bailouts in 2008 were not from the very poor, but the very very elite Rich who would have lost everything had the Banks and Financial Institutions been allowed to have failed in 2008. The Balance sheet of a Bank is in most instances at best comprised of only 5%-10% of general savings deposits. The 90-95% of Banks Balance Sheet is typically Toxic Assets (ie assets that become a major liability for the Financial Institution if the claimed market value of the asset falls and has to be marked down to true value, such as has just happened with Greek Debt in March 2012.).

Capitalism is about efficient allocation of resources, traditionally Land Labour and Capital. Banks and Financial Institutions in the current Capitalist system decide which oragnizations are allocated capital, it is very questionable that market forces are allocating capital efficiently, given the sheer size of the "Too Big to Fail Banks." When these mega Financial Institutions now have Banlance Sheets far greater than a Countries GDP, market distortions could easily occur when large Financial Institutitions consider, "It in their self interest, rather than liquidating assets and accepting the market price, to leverage up and borrow even more in the HOPE that in the long term the toxic asset can be made whole."  In its simplest form, this is exactly what the  European Financial Stability Facility (EFSF) is designed to achieve. A short term fix in the hope that all will be merry in the long term. They talk about "Fire Walls" but these so called  "Fire Walls" are only designed to redistribute wealth from the 99% to cover up the losses of the 1% elite. Case in point ECB in March 2012 dispensed 1/2 Trillion Euros for 3 years at 1% to the Financial Elite and yet all these Financial Institutions in 2008 were on the verge of Bankruptcy. A poor person with a poor credit history would not have a hope of borrowing even £1000 at 1% and yet the financial elite through the way the current Reserve Bank Monetary Capitalist system operates are able to borrow infinitum  "Free Money" very soon after they were on the verge of Bankruptcy. These Mega Financial Instutitions also get to decide where the money from 1/2 Trillion Euro's goes into the economy. Market Forces can not possibly be allocating this money efficiently as a  few well connected elites decide where the money goes in the economy, that can only but be described as "STATE CAPTURE"

Governments including the UK government are now held hostage to "The So called Market" as any hint Government borrowing will increase will lead to money markets dumping UK sovereign debt. The irony is that "The So Called Market" is not you and me, but these major Financial Institutions and Hedge Funds supported by huge leverage from the Financial Institutions who were Bailed Out by Governments around the world in 2008. It is beyond belief that Governments can be held hostage under such a scenario, but this is where we are in 2012. Governments can't default on their Soveriegn Debt for Fear the Market will punish them and yet, Keynesian Economic Theory suggests that Governments should be borrowing and spending in times of economic uncertainty, but borrowing from "The Market" will lead to Credit Downgrades and as we have seen with Greece, "The Market" heavily punishes a country, forcing Austerity upon the Country.

Japan has been caught in economic stagnation for 20 years, largely because they have not accepted the Bank Balance Sheet losses since the Economic bust in the 1980's. UK is quickly following Japan with endless Printing of Money now Quantitative Easing is used as a euphemism to deflect attention from the fact that QE is the only policy tool now available since interest rates have been at rock bottom for several years. QE leads to massive inflation, simply look at the price we are all paying at the Forecourt. In yet another twist to "State Capture" the Financial Institutions can front run the purchase of Crude Oil contracts from QE before the real market, yes that is you and me filling up a few litres of fuel at the forecourt have a chance.

While harsh, the only Solution to restore economic equilibrium in the UK is to allow Banks to be placed into Insolvency, but with a caveat to build a "Fire Wall" to protect Depositor Savings only. Since 2008 there has been no attempt to establish mechanisms to place Banks into insolvency and isolate Depositor Savings with Deposit Savings transferred into a Good Bank owned by the people for the benefit of the people.

Have your say at E-Petitions Now

Stop the endless Bailouts

Be part of a London Peoples Bank run by the People for the People

Toby Chambers
Economist and Social Entrepreneur


  1. Isn't the current proposal - of a mister G. Osbourne - of 'ringfencing' the UK banks trying to do just that - seperate the retail deposits wing of the bank from the investment wing? It is my understanding that in this new model, the investment wing of a bank could be allowed to fail whilst the everyday deposits wing would not. The current problem is that these two parts of a bank are together.

    Or is it more complex than that?

  2. Ring Fencing while a start to solve all the issues, the reason why it is taking so long to implement is that basically the Banks would have to raise Hundreds of Billions and for obvious reasons there is resistance.

    The major issue as per Governments recent annoucement to provide guarantees to Small business borrowing is that Financial Institutions get to decide who gets the Capital dished out by the Reserve Bank and ironically have to give banks incentives to lend to small business to get economy moving again, while the banks themselves can use the money for "Speculation" ie buying Crude Oil Contracts pumping up Crude Oil price.

    This Merry-go-round of money with QE has to end and the only way it can for the real economy to recover is that Banks be placed into Insolvency. This would be quicker and more efficient rather than have Banks "trade out" of their Bad Legacy Debt that now includes sovereign debt.