The Independent Commission on Banking are currently preparing their final report on the financial sector for the Coalition government. During the financial crisis of 2007-8 the state was compelled to spend vast sums bailing out British banks. Indeed without massive state intervention the country’s entire system of credit would have collapsed altogether. It is therefore worth noting what one member of the Commission considers to be the necessary consequence of state bailouts. In his Why Globalization Works Martin Wolf wrote:
The management of any systematically important bank that has to be rescued by the state should be disbarred, as a matter of course, from further work in the financial industry. Remember the fundamental point. Big banks have consistently operated in the knowledge that their profits are private and losses, if large enough, public. In other words, the institutions they run are underpinned by the state. Managers are, in an important sense, public servants. If they abuse that trust, they should be treated accordingly.
Why Globalization Works (Yale University Press, 2005, paperback edition, page 298)
Given that the management of every systematically important bank was rescued by the state in 2007-8, Martin Wolf is now, presumably, calling on the Commission to disbar their management from further work in the financial industry. As he notes, they are ‘in an important sense, public servants’. On any sensible measure they have abused the public trust and should now be treated accordingly. And Martin Wolf’s eminence as an economic commentator means that his opinions cannot easily be dismissed.
And his strong line on banking will surely find an enthusiastic reception in the Coalition. After all, they have made no secret of their desire to trim a bloated and inefficient public sector. What better candidate for root and branch reform could there be than the banks? Presided over by inept public servants and buoyed up by state subsidy they have failed to manage credit efficiently. Rather than investing in industry they inflated asset price bubbles and vastly enriched themselves in the process. When the inevitable crash happened they turned to the government for help.
Martin Wolf is right. It is time we put an end to this expensive charade. I look forward to the moment when the Independent Commission on Banking says so unequivocally.