Lib Dems on financial regulation - Swimming against the tide

No doubt there was a flurry of excitement amongst bansturbators and regulators today in Harrogate as the Lib Dems debated a motion on banking regulation, the credit crunch and whipping city boys. And there comes a time in a man's life when you realize that you are so far out of step with the way everyone else is thinking that you can lose confidence in your own opinions, maybe even think you are wrong and ought to cave in to the prevailing opinion. Especially when the prevailing opinion is being promulgated by such august people as former city regulator and current regulation specializing barrister Charles Marquand in his motion "Reforming the Financial Sector".

And when an alternative motion on the nature of credit creation itself was refused by the conference powers that be (even though I didn't support all of it it came closer to pinpointing the problem than all this regulatory stuff) one gets the additional feeling that actually, what the party wants, is simple messages, not necessarily the right messages. Populist measures not technical systemic change for the better.

We have three times I think now tried to get a proper motion on the monetary system debated at three consecutive conferences, and been knocked back every time in favour of these anodyne, populist and "don't have to think too hard" debates.

And this is a big problem for me. These systemic problems with the economic landscape in our world are so fundamental to equity and fairness for everyone, problems which our Liberal forebears knew and understood a hundred years ago and more and which we have an opportunity to address anew in this biggest of financial crises when everyone is looking around for a different paradigm to avoid it happening again.

Every single policy debate this weekend that I can see, on schools, on higher education fees and so on are so crucially underpinned by these fundamental economic issues. Economics is about the efficient allocation of resources of course and what are these public policy debates other than tussles for the different allocation of resources.

We will never, NEVER I say again, make significant headway in addressing inequality in our country or the world until we have grasped these fundamental problems of the economic system. If, when such an important and yes, exciting, opportunity to change that economic landscape as our ideological ancestors wanted to do occurs and we miss it, can anyone give me a good reason for sticking around? When it IS, quite simply, the most important opportunity in nearly a century to make the right changes, not just the right sounding changes.

The evidence suggests that we are a party that cares more about political grandstanding, good headlines for one constituency or another, and tinkering, than about addressing the real causes of inequity and unfairness. It may be "democratic" - in which case I am clearly on the losing side of the demos's opinion making, but one has to wonder about its commitment to liberty and liberal values if it misses the big picture so spectacularly.

Of course, I should have been there to join in the debate and put forward counter-proposals, though part of the reason I am not is the refusal of the party apparatus to accept such counter proposals for debate in the first place. But here is my contribution to the "Reforming the Financial Sector" debate for what it is worth:

F6: Reforming the Financial Sector

Conference notes that:

A. From the end of the 1990s financial institutions increasingly engaged in highly risky practices, such as excessive lending to individuals, and creating and trading extensively in complex and poorly-understood financial instruments.

From the end of the 1990s the government in power in the western democracies felt that as a result of a previous asset bubble - the "dot com" bubble bursting there was a danger that we would go into recession. For Labour in the UK that would have meant an early disaster in their claim to have become the party which the country could trust with the economy - one of the significant factors in them not regaining power earlier. Gordon Brown has made much of "ending boom and bust" and "the longest continuous period of growth in history".

Had we gone into even a mild recession in the late 90s and early years of the new century they could easily have lost the 2001 election. The "feel good" factor had to be maintained, and the way to do that was to ensure we could spend our way out of any impending recession. The Bank of England, independent in name but not really in policy, was given a commission to ensure that borrowing was kept cheap and the only way to do that without inflation was to ensure money was lent against the one thing that did not feed properly into the inflation figures - real estate. As a result, millions of people have overpaid for their most basic need, shelter, have taken on debts they would not normally have countenanced, and all for a political aim.

Of course bankers liked the idea since it meant profit for them if all went well. They knew, however, that it was risky - the old models of debt affordability had to be rewritten to enable those previously less able or willing to borrow to do so without too much additional default risk to the banks. Yes, they created esoteric new instruments which have ultimately become so difficult to value that the system has ground to a halt, but they did so in clear pursuit of public policy to inflate the money supply as surreptitiously as possible.

In summary: the bubble, the bursting of which has created the current problem, was created by politicians trying to manipulate markets for political ends and in the process has stolen, there's no other word for it, stolen billions of pounds of ordinary folks' wealth (not just now in the collapse, but on the way up too - rising house prices and rising debt are a massive transfer for the poor to the rich, just as printing new money to cope with the collapse is a massive transfer from the poor to the rich).

B. The financial sector has lost sight of its primary function of providing investment funds to businesses in favour of speculative activity and in so doing has become disconnected from the wider economy.

I don't know about others, but if you work in debt advice, you will see these symptoms in everyone. You are encouraged to borrow, to trade, to gamble, and when you start to see that it is more risky than you might have first thought you try and mitigate it, many hide it, in ever more desperate attempts to avoid addressing their problems. What we have witnessed is no more than what would be for an individual in debt a pretty normal panic response. But let's not forget, they were acting in pursuance of stated public policy - to increase levels of debt. Eddie George said so. The Treasury Select Committee heard him say so. Did they not wonder at the time what he meant? What are our representatives for?

C. In 2008 the financial sector underwent a significant shock which pushed major financial institutions into insolvency, threatening systemic collapse and having severe consequences for businesses, ordinary consumers and their families.

Indeed. So much, so obvious...

D. These events were the direct consequence of acts, omissions and developments during previous years and in particular the result of:

I. Failures by government and the regulatory agencies to take heed of the warnings of the Liberal Democrats and to take action to moderate levels of personal debt, rising property prices and excessive risk-taking by financial institutions.

II. Remuneration policies in financial institutions which encouraged individuals within them to engage in excessively risky behaviour without regard to the consequences.

Yes, the Lib Dems, both under Vince Cable at the treasury brief and Matthew Taylor before him were flagging up these issues, but the fact that nobody listened to us back then does not mean the reasons have suddenly changed. We knew this was a public policy issue back then - the encouragement of saving Britain and Labour on tick. That reason still applies, in spades, today.

With hindsight we can add in other reasons like II. but let's face it, whenever anyone has mentioned banking reform in the past we've been met with the claim that our pensions owned the banks, so as shareholders they should have been more concerned, yes, but that does not make it a matter for public policy. If the government wanted banks to lend more to keep them in office, then their executives should have been rewarded for doing the government's bidding.

But we also know that the bonus culture and the obscene amounts of money involved, arise not because of short termism per se, but because of what it is they are trading in - they have long had massive bonuses based not on what the real economy is doing but on the massive volumes of "our money" that passes through the city every day. Some people look to the likes of George Soros for a way out of this - actually it's things like his trading in vast unfathomable volumes of money that create this bonus culture.

Like estate agents, if part of your earnings are based on the commission you earn by your deals, when you are trading daily in over a trillion dollars worth of currency (as has been going on for two decades) then even the smallest percentage of commission is going to be pretty impressive. Market makers will claim that such volumes, unrelated as they are to the money moving needs of the real economy (foreign currency transactions for business requirements for example are a small percentage of daily turnover in those markets), are necessary in the way the market finds the correct price for any commodity.

Yes, the figures sound gross, but they are so gross because the commodity they are dealing in - they have a very privileged position in being able to create, manipulate and move vast sums of effectively fictitious money around - is one which we collectively underwrite for them - our currencies. The problem is the very basis on which the system works, not the rewards for playing that system. We forget at our peril the words of Winston Churchill in the 1909 debates that we should not be attacking the people who play the system we support but the system itself. None of this motion attacks the system itself - the way we create money.

And so the remedies offered by this motion amount to little more than the palm court orchestra playing on while the ship sinks...

Conference believes that:

i) The failure of government and the regulatory agencies to take action flowed particularly from an attachment to the principle that financial markets and actors in them should be subject to as little regulation as possible, which became known as ‘light touch regulation', and generally from an erroneous belief that free markets will always produce the best outcomes for producers, consumers and society as a whole.

No, the failure of government to take action arises from the fact that the powerful, politically and financially, are the only ones actually to benefit from the corrupt money system we have. Inflation helps government conceal their profligacy and fiscal failures by revaluing their debts downwards. The system, as we have seen, allows them to try to manipulate markets for political ends - in this case saving Labour's skin in 2001 by borrowing our way to avoiding a recession.

ii) These principles and beliefs, as shown by the events in late 2008, were flawed in that they led to the privatisation of profit and the socialisation of risk, such that incomes of individuals and institutions in the financial sector soared whilst business and individuals in the wider economy were exposed to high risks of financial harm in the event of failings and defaults in the financial sector.

This one contains a grain of truth which is then lost - the "privatisation of profit and the socialisation of risk" is precisely and undeniably what John D Rockerfeller Jnr and J P Morgan Jnr (notice who gave T Blair his first post-premiership contract) persuaded teh state to collude in with them in the formation of the central banking system we have today. When will we realize that it was constructed by the rich and powerful for the rich and powerful and there is no earthly reason why the money system we have now should be the only one we consider. The nature of money has changed throughout human history and the current crisis should be seen as the death of this particular incarnation.

iii) Events in late 2008 and the role of the financial sector in producing them highlight the need to reform radically the financial sector.

..or highlight the need to reform the money system - anything less is tinkering, and not radical at all.

iv) Far from retreating, the state will need to intervene to ensure effective regulation of financial markets in order to promote stability, counter short-termism and protect the interests of business and consumers.

The interests of business and consumers are fundamentally opposed to the interests of the monetary authorities and politicians in this respect though. What we need for sound business decisions and sound savings and investment is a sound currency. The rich and powerful need a money system they can manipulate, which is the opposite of sound money.

v) Incentives within the financial sector should be better aligned with the broader goal of building a fairer society.

In a free money system the financial institutions would only be able to make a profit if they were contributing to fair and free trade. Since the money system is anything but fair and free trade, but a state regulated and protected oligarchy one wonders whether politicians will ever countenance the reforms needed unless we do allow this to go spectacularly bust.

Conference therefore calls for a reconstitution of financial regulation so that:

a) Financial institutions and their staff are discouraged from excessive short-term risk taking, for example though remuneration policies which reward only long-term success and which ensure that those whose actions are harmful or cause loss bear the consequences of their actions.

...or by governments not telling them to take on riskier debt in order to bale them out of an electorally damaging recession.

b) Financial institutions make credit and investment available on reasonable terms to businesses and individuals in the wider economy.

...which would still be happening if governments had not run up the flag of irresponsibility by asking them to make lending artificially cheaper.

c) ‘Intermediate' financial institutions, such as hedge funds and private equity vehicles, are properly and effectively regulated and in particular are required to be transparent.

...or how to ensure the City of London never recovers. Most of these are simply "investors". Professional investors to be sure. But if we regulate them they'll just start spending their days on the beach in sunnier climes than ours with a laptop and a phone to their brokers. Furthermore, the level of regulation already in existence means that for good ideas to get capital they tend to need these venture capital style sophisticated investors. Get rid of them and our economy potentially will never recover because the adventurous investors willing to take a punt on a business idea will evaporate.

Conference also calls for:

1. The encouragement, support and promotion of credit unions and other kinds of mutual financial organisation.

2. The government and financial regulators to work for more decentralised banking institutions and a localised financial infrastructure.

Neither of these are achievable through more regulation. I should know, I've been trying to set up local, mutual financing mechanisms and the weight of regulation is such a barrier to entry that it is next to impossible unless you are already very wealthy and are allowed (which c. above would probably prevent) to invest freely as a sophisticated investor.

3. Improved access to financial services thorough the Post Office network.

...yadda, yadda, yadda...just more posturing for the Focus leaflets.

4. Free and independent financial advice to be made available to those on low incomes.

With a system of competing currencies in a free market it would be likely the responsible financial institutions intent on gaining and keeping customers would provide such services. In an economic landscape that was more favourable to the less well off, by eradicating rent and interest, this would be less necessary in any case. People are quite sophisticated you know - it is quite patronizing to think otherwise. The "grey economy" testifies to that.

5. A statutory duty to be imposed on all lenders to lend responsibly, giving borrowers a statutory right of action in cases where there has been irresponsible lending.

See - the state intervenes again. What's wrong with contract? And above all, banks responsible for their own fortunes via their own circulating currencies, would have every incentive to ensure they did not take on dubious assets - irresponsible loans. But for the state to start deciding what is or is not responsible (as Gordon Brown has this past couple of weeks with his railing against 100% mortgages) is hardly a liberal response. It is a statist response.

6. Consumer protection to be strengthened with stronger penalties for those who mis-sell financial products using aggressive selling practices; with a statutory maximum interest rate to protect vulnerable groups from predatory loan sharks and doorstep lending.

...yeah - and I'll bet the people who dreamed up this motion wouldn't hesitate to support Mohammad Yunus and his micro-credit system.

No doubt this motion was received with some rapture amongst the faithful at Conference. If so, it is in my opinion a disaster for the party and the country. We keep shying away from this once in a lifetime opportunity to argue for real, radical change, for liberal policies and we return to state regulation and protection. I am beginning to get ashamed of my membership card!