I've Watched
the Economy for 30 Years. Now I'm Truly Scared
By Will Hutton
28/09/08 "The
Observer" - -- If more people understood what
has happened in the British and American banking system, the
financial crisis would only be containable by the immediate
partial nationalisation of every bank in Britain and
America. There was not a run on the banks by depositors
queuing in the streets to withdraw their savings. Rather, it
was an escalating and terrifying run on the banks in effect
by themselves, which, if it spread to millions of small
savers, would reproduce the events of 1929.
In Britain, the money markets
that the banks organise between themselves completely froze.
Such was the break down in trust and sense of panic that
some of the most familiar names in British high street
banking would not lend to each other at all or, at best,
just overnight. Instead, the Bank of England had to supply
tens of billions to banks who found the normal sources of
funds blocked.
I have been writing on the
financial markets for nearly 30 years. I have known the
system was becoming increasingly fragile, but for all the
ferocity of my criticisms, I never expected the scale of
today's events. Or that I would begin to wonder whether my
own bank would survive without nationalisation. The
negotiations in Washington over this weekend to finalise the
$700bn Paulson financial bail-out plan, and the expected
vote on Sunday, are all that stands between the
Anglo-American banking system and a first-order disaster.
The scheme had better work.
This is not the end of
capitalism, as some wildly claim; there is no intellectual,
social or political challenge to a market system based on
respect for private property rights, even by the Chinese
Communist party. Rather, it is a crisis of a particular
capitalism that has set aside respect for trust, integrity
and fairness as fuddy-duddy obstacles to 'wealth
generation'. What we are relearning is that without trust
and fairness, capitalism risks its own sustainability, even
while it unleashes forces that undermine those self-same
values. London's money markets froze because of a trust
collapse; banks simply don't believe each other when they
say their businesses are sound and will not default on their
obligations. Trust matters.
And although some
conservatives in Britain and America continue to make the
ideological case against any government action as a response
to the recent turmoil - governments necessarily do
everything worse than the market - they have no alternative
proposal about how to restore trust once it has gone. Trust
is a reciprocal relationship, dependent upon a desire to be
considered decent and honourable. Even in the dog-eat-dog
financial markets, trust and integrity are matters of
self-interest. However amoral you may be, it is in your
interest to care about your reputation, because if you
behave badly you will not do business with me - or others -
on favourable terms again.
But the scale of the
personal rewards now available in London and Wall Street -
£15m-£20m at the top is the norm - along with the
greed-is-good doctrine associated with extreme laissez-faire
economics, has trashed the need for individuals to worry
about integrity. They don't need to be concerned about their
reputations; they just need one deal or one year at the top
and they need never work again. The incentive structure has
so departed from one of the principal norms of fairness -
proportionality between value added and reward - that it has
eviscerated trust relationships and integrity.
Everybody tries to 'game'
the system on their route to vast personal fortunes -
whether short-selling, packaging up dud mortgages as prime
mortgages or telling lies about their financial viability -
and the result is that the system is getting wise. The best
course today in any financial transaction is to presume zero
integrity. Credit is drying up and with it the very
lifeblood of the economy.
Worse, now that the system
is in trouble, financiers are turning to taxpayers in the US
and Britain for help without understanding the other key
principal of fairness - that we will consider helping those
who for no fault of their own get into trouble, but not
those who freely created their own bad circumstances.
Hank Paulson certainly acted
decisively in launching his plan, but the former Goldman
Sachs CEO, who negotiated a special exemption from tax when
he took the job, like his former Wall Street colleagues is
not well endowed with the fairness gene. It polluted the
very design of the scheme.
He knows that unless the US
government does something comprehensive, the entire
financial system is at stake, but his original plan was
designed to bail out the system intact. It made no demands
that any financial executives sacrifice pay or bonuses
despite having driven their firms and wider economy to the
point of bankruptcy. He does not want the government to
provide new bank capital to help recapitalise a bust banking
system. Instead, he wants the government to buy their toxic
debt and so leave the banks unreformed. On top he wanted
complete discretion to act as he chose without any
oversight.
American economists of every
persuasion signed a joint letter complaining not at the aim
of the bail out, which is plainly vital, but for its lack of
fairness. Conservative papers and politicians echoed the
complaint. Suddenly, Wall Street is coming back to earth.
The transactions from which it skims such riches are built
on the savings of ordinary Americans to whom it has
obligations, as it has to other Wall Street firms. What we
know now about the yet to be agreed compromise is that
Paulson has accepted Congressional oversight, will offer
direct help to distressed US homeowners as well as banks,
and will accept some constraints on the worst excesses of
executive pay.
But the core proposal
remains. The government will buy toxic debt rather than
inject government funds into the banks' capital base, in
other words, reject even partially nationalising the entire
US banking system as the Swedes had to in 1992. I don't know
- nobody does - whether the Paulson plan would be sufficient
or whether ultimately the Americans will have to go for
nationalisation. What I do know is that unless there is a
radical and government-led change in ownership, structure,
regulation and incentives so that the principles of fairness
are put at the heart of the Anglo American financial system
- proportionality of reward and fair distribution of risk -
there is no chance of the return of trust and integrity upon
which long-term recovery depends.
The political debate in
Britain and America so far little reflects this need - but
it will. Barack Obama's election as President is much more
likely. And the discourse in Britain will follow. Brown may
be crampingly cautious but, unlike Cameron, he does
understand that without government action the restoration of
trust and fairness may never happen. This week, I expect the
nationalisation of the stricken Bradford & Bingley to join
Northern Rock. It is but another in a long sequence of
interventions that are imperative to save the system from
its own proclivities. Once again, the left is coming to
capitalism's rescue.
