The London Paper – 4 Sept 2009
Last week Lord Turner, the chairman of the City regulatory body the FSA, said that many of the City’s activities (e.g. trading, derivatives and hedging) were ‘socially useless’. He also said he would consider taxing banks’ financial transactions in order to reduce the banks’ size and their ability to hand out excessive bonuses. The City was absolutely horrified though traffic wardens and estate agents alike breathed a huge sigh of relief as attention was temporarily drawn away from their social ‘usefulness’.
Of course, Lord Turner has hit the nail on the head. Banks used to perform a useful social role. They lent out cash so that people could buy houses and businesses could expand. Investment banks also played a vital role in ensuring efficient companies were rewarded with cheap capital whilst poorly run companies were punished (and thus subsequently vulnerable to being acquired by the efficient companies). Banks oiled the wheels of capitalism.
It all went horribly wrong when greedy tossers took banking practices that had a half decent raison-d’etre and perverted them. Well-intentioned products were transformed into pointless new ways to gamble that served no-one other than the selfish pinheads who traded them constantly so as to garner ever more commission.
For example, futures (which are an agreed contract to buy or sell an asset at a specific price at a specific date) were developed to give farmers a degree of certainty over the price their crops would receive before harvest. Farmers and crop buyers could hedge themselves by buying or selling them. Nearly all assets now have futures contracts related to them but they’re not traded by farmers but rather pin-striped speculators who simply want to make a fast buck. Billions of these incredibly volatile ‘financial weapons of mass destruction’ (as Warren Buffet called them) have infected the whole world and that is why the fall of a single firm like Lehmans can have a hideously destructive knock-on effect for a bunch of other banks. This scenario occurred almost exactly 12 months ago and helped turn a drama into a crisis.
The City is a bit like a fruit and veg market. However, in this market most of the cash is being traded and made by gamblers on the sidelines who are constantly making bets about what the vendors might do in the future. This wouldn’t be so bad but when these gamblers screw up we all suffer because their banks then cease to perform their socially useful function of lending out cash. Hence, the actions of speculators helped result in banks freezing the wheels of capitalism instead of oiling them and we all suffered in what became known as the credit crunch.
When you group together a bunch of bright, ruthless scumbags they’ll always find ways of transforming benign products into get-rich-quick gambles. Lord Turner wants to tax these speculators into submission but I think it will take more than that. We need restrictive regulation on all their dodgy practices. If not, estate agents and traffic wardens might start genuinely believing that they’re relatively socially useful … and nobody wants that!