The John McDonnell Column
The Budget will seize all the headlines but something happened in Parliament this month of much greater long term significance for the future of our economy. With little coverage in the media, the Government introduced into Parliament its latest Banking Reform Bill. This is meant to be the last piece of the architecture being put into place to regulate the banks and avoid another financial crisis.
The idea behind the new Bill is that the activities of banks are to be split between retail banking — the traditional day – to – day provision of a safe place for people to deposit their income and then lending this money to individuals and businesses — and investment banking, which is the large scale speculating and gambling operation that contributed to the current crisis.
The aim of this split is to prevent the speculation by the investment side of banking contaminating and bringing down traditional retail banking. Many thought this split would be achieved by legislating to introduce a legal separation between retail and investment banks. Once again this completely underestimated the lobbying power of the banks and the City of London. They have been working quietly, but arduously, behind the scenes to ensure their interests are protected.
Instead of splitting the banks, the Government is leaving the banks structurally intact and is simply introducing a ring fence between the two roles within the bank. There is confusion about what falls on either side of the fence. For example, it appears that retail banks will be able to speculate in derivatives, which were just one of the many types of instruments used for gambling by banks which created the debt bubble that burst in 2007/8. This lack of clarity makes regulation impossible and simply hands the dice back to the gamblers.
The Government’s opposition to the cap on bankers’ bonuses being introduced within the EU has also sent out the signal that the Government is happy to turn a blind eye to a return to obscene payouts in the City. There has been no mention by the Government of any attempt to regulate the burgeoning shadow banking sector. This system comprises an estimated £50 billion of hedge funds, private equity, trust funds and other financial instruments. The structure being put in place gives the impression of regulation, but in reality its sole purpose is to allow the casino wheels to start spinning once again.
The response from Labour’s Front Bench has been extremely muted. There have been complaints about some of the minutiae of the Bill and a questioning of whether the ring fence can be “electrified”, in other words made more effective in separating off the speculating activities of these banks. But there has been no clear alternative put forward by Ed Balls. Ed Miliband has recently proposed the establishment of a German style system of regional banks but has suggested little else of substance on one of the most significant issues facing any incoming Labour Government.
If a Labour Government fails to take control of our financial sector after the election, then once again it will be dictated to by the banks and City. Now, just when the general public hold the banks and bankers in such contempt, is the ideal time to wrest control of our economy from finance capital.
Several socialist economists have set out the basic steps of taking control of the banks. The FBU’s recent pamphlet on the nationalisation of the banks explains how banks could be brought into public ownership and placed under democratic control so the resources of our country could be invested in putting people back to work, tackling climate change and providing the public services we need.
The socialist economist and professor of accountancy, Prem Sikka, has described banking reforms that would halt madcap speculators and place banks under greater democratic control by having their directors elected by their employees, savers and borrowers. Prem’s proposals on controlling directors’ pay, reducing bank leverage, introducing a financial transactions tax and independent regulation would transform the banking system from a cesspit of corruption and greed into a public service supporting a productive economy.
When Melenchon visited London he said the way he sought to gain credibility for his left challenge for the presidency was always to demonstrate that the left was willing and able to take over government the next day. In a politically and economically unstable climate, the British left needs to get serious once again about attaining power. This means showing we have detailed policies that would enable us to govern effectively. The policies developed in recent months on banking and the finance sector demonstrate we have the capacity within the left to address key issues facing our people. We now need to roll out this detailed analysis to other areas of policy.
John McDonnell is MP for Hayes and Harlington, the Chair of the Socialist Campaign group of Labour MPs and the Labour Representation Committee.