Five years ago: Do you remember? The old world’s economies were crashing. Jobs were haemorraghing everywhere (except China). Six months after the collapse of Lehman Brothers, the global banking system was still cratering.
A one-day summit of the G-20 economies was called in London to put a floor under the collapsing structure, re-float the economy, and re-regulate the financial institutions that caused the mess in the first place.
On the way to the Excel Centre to cover the meeting, I stopped off at Canary Wharf. The idea was to talk to the people who would be most affected by the new regulations being discussed.
Canary Wharf was Sunday morning empty. Anticipating anarchist action, most people had been told to work from home. (The anarchists had not reacted nicely to being kettled down by the Bank of England the previous day. There was fear the black balaclavas might turn up at the Wharf instead).
I found myself talking to two men by a Starbuck’s kiosk at Cabot Square. I asked them what they thought about the new regulations.
Have you seen the Daily Mash today? one of them asked. It has a piece that says ”Bankers are smarter than politicians, they can find their way around any regulations they put on in place.”
That’s the truth, he added. “It doesn’t matter what they do. We’re smarter than they are. We’ll figure a way around it.”
It was a quotably arrogant statement. I scribbled it down and asked the guy’s name. His courage didn’t run that far. As a reporter I’m used to this: tough talk, bully talk from people without the guts to put their names to a repulsive statement. I’ve recorded this kind of anonymous boasting on the Shankill and in the Republica Srpska and road houses in the American South. It’s trash talk from people who know the game is lost and they won’t pay a price for having been on the losing team.
The pair were an example of something critics of the bank bailout were talking about: moral hazard. If you bailout the banks without imposing strict regulations at the same time, what is to stop men like this from wrecking the system all over again?
At summit’s end, Gordon Brown came out – alone – to meet the press. The first detail he mentioned was a reform of financial industry regulations. Hedge funds would be regulated for the first time and the shadow banking system exposed to sunlight. Credit rating agencies would be regulated as well.
He mentioned the reforms first because the French and German governments had made it clear they wouldn’t contribute to a stimulus package without serious reform of the banking industry. Moral hazard. If you bail them out without conditions, they’ll only do it again.
But the big headlines were about the 1.1 trillion dollar stimulus package for the world economy to be administered via the IMF.
It wasn’t just the size of the bail-out that drew journalists’ focus. It was the lack of specifics about regulations. Brown did not offer a time frame for drafting them nor say which body would be empowered to implement them. Regulatory reform became a secondary factor almost as soon as Brown finished speaking.
Looking back it is easy to understand why regulations were put to the side. In the US and UK jobs were haemorraghing at an alarming rate. In an exercise of pre-emptive downsizing of unparalleled viciousness, 2.6 million people had been thrown out of work in the US in the six months after Lehman’s went bust.
Unemployment was shooting up in most of the established economies. When the G-20 leaders met, stemming these job losses was the paramount concern, not moral hazard.
The extra funding made available to the IMF, made possible by contributions from individual nations and the sale of its own gold was going to stem the job losses.
Over the next few years, occasionally, the EU made an effort to cap bankers’ bonuses and put some form of regulation in place. But each attempt ended in failure and when it did, I found myself thinking about the two bully boys at Cabot Square.
Then they and the thousands in the City who think like them, had a nice run of luck.
The immediate fear of losing one’s job replaced the pressure for banking reform from the public.
In Britain, the Conservatives took power with the help of an extremely weak coalition partner and blocked every meaningful effort domestically and internationally to regulate the City.
Then came the most important piece of luck: The crash set in motion a causal chain that led the most over-leveraged eurozone countries to the brink of default.
The still unregulated City speculators drove the frenzy that pushed bond yields to extraordinary heights in the at risk countries.
The focus of policy makers shifted from regulating the financial industry to saving the single currency by imposing draconian austerity measures on Ireland, Greece and Spain. More people lost their jobs.
But not in financial services. Throughout the autumn of 2011, betting on fractional movements of sovereign bond yields became the latest game in the casino.
The conversation shifted in the Anglo-phone world. The real threat to the global economy wasn’t the unregulated speculation centered in London and New York that the G-20 promised to deal with, it was now the euro that was the cause of all economic hell and prolonged recession.
That put the regulatory fire out for the City. Meanwhile in the US, the one meaningful attempt at regulation: the Dodd-Frank bill was passed in 2010 but implementation has been delayed repeatedly. It is still not fully operational.
Today, in London, the economy is pretty much where it was just before the crash. Bonuses are at pre-crash levels, scandals in the city like fixing the Libor rate unfold regularly. Unable to generate growth, the government orchestrates an insane housing market bubble. The Shard stands empty – the perfect symbol of our era.
Moral hazard is priced in. JPMorgan CEO Jamie Dimon got a 74 percent pay rise in January – a package worth $20 million – despite the fact that his bank paid $18.6 billion in fines in 2013 plus a further billion in legal fees.
Unthinkable levels of unemployment are priced in as well. 20 million American workers who want a full time job can’t find one and now, it is clear, never will. These aren’t just factory workers. They include the more than 50% of university instructors in the US who work on part-time contracts and millions of people like me, one-man band entrepreneurs of the professional classes.
We are the new self-employed, living on a combination of a few bits and pieces of freelance work and a judicious drawing down of retirement savings.
Britain’s ONS doesn’t keep a similar statistic on how many want full time employment and cant find it but that doesn’t matter, the Anglo-American economies have so much in common it is a reasonable guess that a similar percentage of the British work force is fruitlessly searching for that increasingly elusive full-time gig. (5)
And nothing will change.
Strip the City away from the UK economy and you remove most of the good economic news of the last year. 80 percent of new private sector jobs in the UK since 2010 have been created in the capital. What politician would dare mess with that?
Five years after that great gathering of leaders at the Excel Centre I find myself thinking once again of those two men who didn’t have the courage to put their names to their words. It enrages me to think they were right.