Citizen Action Monitor

Ten years after the 2008 financial crash, the cost to Britain is running into £ trillions

What hard lessons did civil society learn, and what plans are afoot to transform the banking sector? Are there lessons here for Canada’s civil society?

No 2028 Posted by fw, August 13, 2017

Ten years ago, the French bank BNP Paribas ceased activity in three hedge funds, announcing that it could no longer measure the value of instruments based on US subprime mortgages. The event is widely regarded as representing the beginning of the global financial crisis, as what had previously been regarded as minor turbulence in the US housing market became something far more serious. Banks stopped lending to each other and the financial system froze, sending shockwaves around the global financial system. The UK, with one of the biggest, most complex, and most interconnected banking systems in the developed world, was uniquely exposed…. A decade on, and the cost of the crisis … cannot be understated. The cost of bailing out the banks peaked at over £1 trillion, while the cost to the economy in terms of loss of income and output has been much greater…. may be as high as £7.4 trillion.

“Civil society is all of us. When we act not for profit nor because the law requires us to, but out of love or anger or creativity, or principle, we are civil society. When we bring together our friends or colleagues or neighbours to have fun or to defend our rights or to look after each other, we are civil society. Whether we organise through informal friendship networks, social networks, community events and protests; or formal committees, charities, faiths and trade unions, whether we block runways or co-ordinate coffee mornings, sweat round charity runs or make music for fun; when we organise ourselves outside the market and the state, we are all civil society.” – Civil Society Futures (Britain)

The article reposted below, published by Civil Society Futures of Britain, calls on “civil society [to] go beyond simply ameliorating symptoms, and start tackling root causes.” CSF defines its role in “tackling root causes,” as that of an information broker and coordinator: “Through community events, academic research and online debate, Civil Society Futures will create a space for a much-needed conversation among those involved in all forms of civic action.

Although Leadnow and The Council of Canadians are two of Canada’s better known civil society organizations, unless I’m mistaken, I don’t believe either creates a space for conversation, “through community events, academic research and online debates,” “among those involved in all forms of civic action.”

Moving right along, below is a repost of the informative article by Civil Society Futures, which makes a compelling case for “civil society [to] begin the long hard task of transforming our banking sector.

Canadians might welcome some “transforming” of our private banking sector by a civil society watchdog: the role of the Financial Consumer Agency of Canada may be too circumscribed to serve as a transformative agent of  financial practices.

To read this post on CSF’s website, click on the following linked title.

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Ten Years After The Financial Crash is civil society ready to take on big finance by Laurie Macfarlane, Civil Society Futures, August, 2017

Ten years ago, banks stopped lending to one another — the global financial system froze

Ten years ago the French bank BNP Paribas ceased activity in three hedge funds, announcing that it could no longer measure the value of instruments based on US subprime mortgages. The event is widely regarded as representing the beginning of the global financial crisis, as what had previously been regarded as minor turbulence in the US housing market became something far more serious. Banks stopped lending to each other and the financial system froze, sending shockwaves around the global financial system. The UK, with one of the biggest, most complex, and most interconnected banking systems in the developed world, was uniquely exposed.

Ten years later, the cost of the crisis is running into trillions

A decade on, and the cost of the crisis – both human and financial – cannot be understated. The cost of bailing out the banks peaked at over £1 trillion, while the cost to the economy in terms of loss of income and output has been much greater. According to Andrew Haldane, the Bank of England’s Chief Economist, the cost may be as high as £7.4 trillion – similar in scale to a World War.

Britain’s real wages have taken a bigger hit than any other advanced country apart from Greece

Since the crisis real wages in Britain have suffered a larger decline than in any other advanced country apart from Greece. Years of austerity has pushed public services towards breaking point, and falling living standards has seen families resort to desperate measures like using food banks. Mark Carney, governor of the Bank of England, recently described the past ten years as the “first lost decade since the 1860s”.

What does the financial crisis mean for the future of “civil society”?

 

As each ten-year milestone approaches – from the collapse of Lehman Brothers on September 2008 to the G20 London Summit held on 2 April 2009 – much will be written about the role of each of the major culprits: the reckless bankers, the weak regulators, the captured credit rating agencies and the blind economists. But what about civil society? What is there to learn from the experience of the financial crisis, and what does this mean for the future of civil society?

Civil society’s blind spot?

By 2010 the UK banking system had – in just 2 decades prior to the crisis — become the largest among advanced economies

In 1960 UK banking sector assets totalled £8 billion, or 32% of the country’s annual economic output. By 2010 this had increased to £6,240 billion, or 450% of annual economic output. Relative to the size of the national economy, the UK banking system grew to be the largest among advanced economies, with most of the growth coming in the two decades prior to the crisis.

Civil society largely ignored the banks and financial institutions and failed to see the coming crisis

Despite this rapid increase in the size and influence of the banks and other financial institutions, civil society did not pay much attention to their activities. Of course, organisations such as credit unions have played a key role in local communities for many years. But in the run up to the crisis few organisations asked difficult questions about the financial sector as a whole, or asked whether it was serving the long-term interests of society.

Also blind-sided were macroeconomists, regulators, central bankers and then PM Gordon Brown

Of course, civil society was not alone in failing to see the crisis coming. The vast majority of macroeconomists were caught entirely off guard, as were the regulators whose job it was to prevent such crises from happening. While the economy was hurtling towards catastrophe, central bankers were hailing the arrival of the ‘Great Moderation’ and Gordon Brown had declared the end of ‘boom and bust’.

Elements within civil society, that should have been vigilant, found it easier to look the other way

Nonetheless, one of the roles of civil society is to ask difficult questions and to challenge power. While it would be unfair to pass blame for failing to foresee the crisis, elements within civil society could and should have acted more courageously to challenge the power of the City of London. But too often they found it easier to look the other way.

Too little, too late

Once the crisis hit, civil society was ill prepared to make its voice heard

Once the crisis hit, civil society organisations scrambled to come to terms with what happened, and what it meant for them. Few organisations were well placed to respond quickly. A longstanding perception that finance was a technocratic field best left to experts had left civil society woefully under-equipped to intervene, despite the fact that civil society organisations are perfectly capable of getting their heads round other complex issues. Moreover, civil society’s capacity was reduced just as it was needed most, as funding sources started to dry up amid the economic fallout. Without a coherent analysis of what went wrong and what needed to happen, civil society struggled to make its voice heard in the process of reform that followed.

On the plus side, the crisis gave birth to new civil service organizations to monitor the financial system

Despite this, there were a number of positive developments. The crisis triggered an awakening on issues of banking and finance, and gave birth to a dynamic new movement dedicated to the cause of financial reform. New organisations such as Positive Money, the Finance Innovation Lab and Move Your Money were established, and alongside older organisations like the New Economics Foundation set out explain the workings of the financial system and repurpose it for the common good.

But lobbying effectiveness has so far been the Achilles heel of these orgabizations

But despite some heroic efforts, these organisations inevitably faced an uphill struggle against the lobbying might of the sector and the ‘insider’ culture of the regulators.

Civil society’s voice has been drowned out by big spenders in the British financial services industry

It is difficult to know exactly how much the sector spends on lobbying, but an investigation by the Independent Bureau of Investigative Journalism revealed that City of London firms provided more than 50% of the Conservative party’s funding in 2010, the year of David Cameron’s general election victory. In 2012, a similar investigation revealed that the British financial services industry spent £92 million in one year lobbying politicians and regulators. Combined with the serial ‘revolving door’ culture between the industry and the regulators, it’s easy to see how civil society’s voice was drowned out.

By December 2015 banking reforms had been water-down the financial system returning to “business as usual”

While the limited reforms did rein in some of the worst excesses, it wasn’t long before intense lobbying from the sector led to them being watered down or rolled back. By 2015 this had paid off, as George Osborne announced a ‘new settlement’ between policymakers and the City and quietly passed a string of concessions to big banks in areas of tax and regulation. Then, in December 2015, Bank of England Governor Mark Carney declared that “the post-crisis period is over”. The message was clear: the financial system had been fixed, lessons had been learned, and it was time to move on. We could return to business as usual.

What next for the future?

The G20 leaders have been warned that “another crash could be just around the corner”

As memories of the crisis fade, it is essential that civil society doesn’t roll over to the demands of bank lobbyists. Many experts outside the industry-regulator nexus warn that financial reforms went nowhere near far enough, and have predicted that another crash could be just around the corner. The Systemic Risk Council, a group of global experts on financial stability, recently warned G20 leaders that the global financial system is vulnerable to another crisis. This time round, they warn, central banks and governments will have far less ammunition available to respond. Similar warnings have come from the Bank for International Settlements, which recently said that another global financial crisis could soon hit “with a vengeance”.

Brexit has greatly elevated the risk, while banksters are busy seeking ways to exploit Brexit

Now, with Brexit on the horizon, the risk is even greater. As more banks start to shift operations abroad, the government has indicated that it may respond by slashing regulation in a bid to stem the outflow of business. Media outlets have reported that bank executives and lobbyists are already working hard behind the scenes to turn Brexit to their advantage.

The task ahead for civil society is to ensure finance serves society, not the other way around

To avoid history repeating itself, there is an urgent need to strengthen civil society’s voice on finance, and develop a credible and effective counterweight to the lobbying power of the banks. We must also work to transform our broken financial system to ensure that finance serves society, not the other way around.

First, it must establish “credible and well resourced civil society voice on banking and finance”

What does this mean in practice? Firstly, it means establishing a credible and well resourced civil society voice on banking and finance. This isn’t a new idea – in 2011 the European Parliament established a new independent NGO called Finance Watch. This organisation receives public funding from the EU, and is tasked with acting as a public interest counterweight to the powerful financial lobby. While Finance Watch’s expert staff are still vastly outnumbered by industry representatives in the corridors of Brussels, the organisation has played a vital role educating lawmakers and the public about the financial system. As Britain starts to plan a future outside of the EU, plugging this gap with a new UK-focused organisation will be vital.

Second, it must begin the work of transforming the banking sector

Secondly, civil society must begin the long hard task of transforming our banking sector. The UK has among the most concentrated banking sector in the developed world, and is uniquely dependent on commercial, profit maximizing banks. The banking sector channels billions into the economy each year, however most of this flows into property and financial markets, inflating asset prices and destabilising the economy. In other countries, the banking sector plays a more positive role by investing sustainably in local communities, and these banks are often characterized by ‘stakeholder’ ownership and governance. In other words, the mission of the bank is not to maximize profits but to optimist returns to a range of stakeholders, including customers and the broader local economy. Empirical evidence shows that these institutions, such as co-operatives, mutuals and public savings banks, perform much better than their large competitors on measures of financial stability, local economic development, business lending, and financial inclusion.

“Steps should be taken to increase the diversity of the banking sector and create new institutions”

Learning from best practice around the world, steps should be taken to increase the diversity of the banking sector and create new institutions which serve the interests of businesses and local communities. Initiatives like the Community Savings Banking Association are already doing this from the bottom-up, but much remains to be done before these models can achieve the scale required to make an impact.

Politically driven neoliberalism – privatization, deregulation, and market logic – got us into this mess

But reforming the banking sector is merely the tip of the iceberg. The financial sector’s grip over of our politics and economy did not happen in a vacuum – it is the result of a set of deliberate political choices to rewrite the rules of our economy. The UK’s sprawling financial sector was, and still is, the pinnacle of neoliberalism – the economic system which has allowed privatization, deregulation, and market logic to penetrate every area of society.

The financial crisis was a product of a neoliberal system that gave us poverty, inequality, alienation, climate change and homelessness

The financial crisis was one product of this system. But challenges such as poverty, inequality, alienation, climate change and homelessness cannot be separated from the economic system which breeds them. To overcome these issues, civil society must go beyond simply ameliorating symptoms, and start tackling root causes.

This means challenging the tenets of neoliberalism itself, and working together to build a fairer and more sustainable alternative.

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