Friday, 6 July 2012

Financial scandals: not new, but revealing

The intricate news of Barclays' manifold dodgy practices, and the subsequent 'easing-out' of the bank's Chief Executive, Bob Diamond (above), is in some ways a not-so-shocking example of humdrum normality.

Shocked at financial misbehaviour, we always seem to remember that such behaviour is an example of everyday corruption. Remember Enron? Remember BCCI? Remember the Mirror Pensioners? I could go on, of course, if you're really unlucky, but the point is made I hope.

What's really interesting, for a historian, is to look at the conditions in which corruption of all sorts - and I don't just mean letter-of-the-law formal rulebreaking - becomes endemic. What we're experiencing now is worse than those episodic examples of waste and fraud. The West's banking system had become fundamentally distorted by the time of the great 2007-2008 liquidity crisis, and all of us little people will be paying the price for years, and perhaps decades, to come.

How did it happen?

Well, there are lots of historical conditions for this (low interest rates sustained for many years, and the consequent gouging of savers, is one of them, but that's for another day). But a glimpse at nineteenth-century financial scandals (Overend Gurney's collapse in 1866 being the most famous), and some more recent economic history too, gives us some generalities we might just dredge up and use. Have a look at these three necessary-but-not-sufficient conditions for widespread corruption and then failure:

Asset price bubbles. House and land prices rose precipitously across the West in the years leading up to the Great Recession, encouraged by governments' own policies as well as by economic growth. Overly restrictive planning policies; middle class fortress mentalities; absurdly generous lending criteria: it was all bound to end in tears, like the railway boom of the 1850s and 1860s. When it did, and in the US housing market in particular, it deflated the great big bubble along with it. Housing market crashes have long been endemic in British economic history; successive waves of property speculation have done great damage (see the crises of 1972-73, 1980-82, 1989-92 to name but three). Now everyone else knows how it feels.

Gross inequality. The UK is now so absurdly unequal that it hardly matters how hard you work. Inheritance taxes are so low, parental house prices so high, top schools so powerful, unpaid internships so critical to the early stages of a career, and regional disparities so grotesque that you're unlikely to work your way out of poverty. We're back to a very similar income profile to that of the Victorian era (an outcome our welfarist and reformist forebears would have deplored) - causing panicky behaviour amongst everyone near the top; a culture of excess and of conspicuous consumption; and a winner-takes-all mentality that's so likely to lead to bad behaviour and an implosion that it's a surprise it didn't happen earlier.

Lax regulation. It's difficult to imageine a more eye-watering set of revelations than we've faced since this crisis hit us. It's become just as much a question of morality and probity as of economics, because almost everyone was asleep at the wheel. Parliamentary expenses; the media scrum over Leveson; bankers' relationship with politicians and civil servants. All of them look pretty grim from the outside. It turns out, dear reader, that many among the three to five thousand people who form the political, economic and media elite have basically been taking everyone else for a ride. No, I'm not surprised either - and nor would anyone else be if they were familiar with Gladstone's ownership of Suez Canal Shares, Lloyd George and the Marconi Scandal, Anthony Eden's behaviour over the Suez Crisis, and so on ad infinitum.

Lessons? Dissaude citizens from borrowing too much in the good times. Reduce social inequality. Regulate more tightly, and prosecute more.

Easier said than done, of course.

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