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Principles for a new Labour economic policy - part 3

Getting it right on banking must be part of Labour's new economic plans. Its actions of 2008 halted catastrophe, but the party must be more vigorous in securing real reform in the City while promoting the prosperity it can bring.

It was a banking crisis which almost gave us a new Great Depression. The extra million unemployed in the UK owe their predicament to the financial sector, its regulators and policy-makers, as Bank of England Governor Mervyn King conceded to the TUC last month. Things could have been much worse. Two years ago, in September 2008, it looked as if the entire banking system might fail. We forget how desperate were those times. The banking payments system could have broken down entirely, making the simple payments of everyday life impossible.

Such a crisis demanded leadership. It was given, both by Gordon Brown and Alistair Darling. The Tories had been calling for spending cuts but we needed to support the banking system. Taxpayers in many countries bailed out their banks. The (world) system was saved.

At the time, people in the financial sector began to question the ethical basis for their investment banking activities. There was much talk of a return to virtue and basic morality, from archbishops and prime ministers alike. At the same time, it was recognised that banking would have to change. There would need to be tighter regulation and banking would be different in future.

How long ago that now seems. Despite being subsidised far in excess of any other industry in history (and despite opposing bailouts elsewhere), the banking sector continues to behave as if it was back to ‘business as usual'. And to a great extent, it is. Central bank interest rates are at very low levels. This means it is easy to borrow short and lend long (at a higher interest rate). Yet we see few signs of gratitude, still less of repentance (ie. a turning away from the old ways of doing things). Indeed, banks continue to pay large salaries to their senior employees. In aggregate it is hard to see how such pay levels can be performance-linked, given the Bank of England has made it so easy to make money. Our manifesto committed us to requiring companies to obtain explicit approval of remuneration policies from shareholders; we should keep this policy.

The Bank of England does at least recognise things have to change. Reflecting on the rise in unemployment, and especially among the young, Mervyn King remarked to the TUC that ‘...we cannot just carry on as we are. Unless we reform our economy - rebalance demand, restructure banking, and restore the sustainability of our public finances - we shall not only jeopardise recovery, but also fail the next generation.'

Better regulation of banks is necessary but not sufficient. Besides, attempts at improving regulation have been a disappointment so far. Bank shares rose when Basel III regulations were announced in September, indicating some investors were relieved they were not as strict as expected. The US has led the way, with a banking reform act based on the Volcker Rule.

Progressives cannot ignore this issue. We cannot go back to the days when investment banking exercised such political power and dominated the economic consensus. We must never be starry-eyed about it, even while promoting a prosperous financial sector. Somehow, after the crisis of autumn 2008, Labour ministers sounded like apologists for banks, pouring cold water on proposals for reform, despite voter anger. It was all too complicated; things were too fragile; more regulation would eventually be forthcoming. Indeed, inaction on banks is one of the few areas of cross-party consensus at present (despite, or because of, the Independent Commission on Banking).

We need to hold the national interest in mind when thinking about banks. We cannot afford another crisis. Banks cannot reform themselves. Therefore we need to take action to encourage the separation of retail or narrow banking (for consumers and businesses) from riskier investment, or casino, banking. This is not to prevent a bank failing in future but to stop a bank failure bringing down the economy with it and to stop retail banking being exposed again to esoteric financial securities. We need also to ensure those on low incomes have access to banking facilities. Labour must engage with this debate. Within the Labour Movement, the Christian Socialist Movement, concerned about the impact of the crisis on the world's poor, continues to campaign on bank separation. CSM's Early Day Motion received support from Labour and Lib Dem MPs (including Vince Cable) and it tried to get a contemporary resolution on the subject discussed at Conference.

Financial policy should not be based on grudges or on any desire for revenge at the irresponsibility of a few. The sector is a vital part of our economy and contains many thousands of good and hard working people. A new Labour economic policy should look to create the conditions for sustainable growth in financial services. Addressing the future shape and role of banks is a necessary part of that.

This article was first published on the Progress website, on 8 October 2010.
Progress, 8 October 2010, 09/10/2010

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