Stressed-out bankers? Diddums!

Seems they just need a shot of testosterone, a bit of good old irrational exuberance so they’ll start behaving like masters of the universe again – as bankers should. Perhaps we should give financial speculators mood-enhancing drugs to get them frisky and risky? Or we could send in an army of counsellors to persuade the banks to go back to lending money they don’t have to people who can’t pay it back.

Of course, I parody Haldane’s observations on the financial panic. He is right of course that markets are moving irrationally – swinging up and down with every piece of good or bad news. But that’s what markets do – especially when there are real and present dangers in the world economy; when individuals can’t and countries won’t pay their debts; and when companies stop producing goods because no-one is buying them in the high streets. The economies of the developed world appear to be slipping back into recession, much as they did in the 1930s after a similar period of phoney recovery after the Great Crash. This is not a psychological phenomenon but an economic one.

It is a political one, too, because politicians in America and Europe appear to have run out of answers. No-one is taking a lead because no-one really knows what to do next. Everything seems to have been tried: fiscal stimulus, deficit reduction, quantitative easing. The world has wrestled for nearly four years with the financial crisis that began in the summer of 2007 when Northern Rock collapsed, and is pretty much intellectually exhausted. President Barack Obama is hiding under the duvet, European leaders appear to be all over the place. British politicians have deluded themselves that being out of the eurozone means that they are not affected by what happens within it. Central bankers are reduced to psychobabble. It is typical of the kind of thinking that emerges at this stage in an economic cycle that people start reaching for the happy pills.

However, Haldane insists that he is only echoing US President Franklin D Roosevelt who said in 1933 that “the only thing we have to fear is fear itself”. Roosevelt’s inaugural address did indeed address the problem of risk-aversion. However, his solution to economic fearfulness was rather different to that offered by the Bank of England today. Roosevelt’s New Deal in 1933 involved draconian controls on bank lending, abolition of speculation, swingeing increases in personal taxation – to a 70% top rate – and a massive national programme of public works, like the Tennessee Valley Dam. He also promoted the growth of trades unions, controlled prices and wages and forced companies to distribute profits. I’ve not heard the Governor of the Bank of England suggesting anything like that. Instead, Haldane wants governments to relax regulation on banks to make them feel, well, more “wanted”.

The basic problem anyway is not risk-aversion, it is debt – public debt and private debt. Everyone knows this, but no-one is prepared to face up to the consequences. Countries like Greece and Italy with debts of more than 100% are essentially insolvent. In Britain, public debt is a more manageable 70%, but private debt is running at 150% of GDP and 35% of unsecured debt is held by households that will never be able to repay. Hopes that house prices would rise again and wipe out the debt mountain have been confounded as real estate starts the long march down to fair value. Have you looked at house prices in Scotland recently?

The story of this crisis is that world leaders got together in 2008-09, looked at the problem, and collectively decided that it’s just too difficult to do anything about the debt. They accepted the bankers’ solution of bailing out their debts with huge amounts of public money, thus taking the burden off the banks’ shoulders and onto the taxpayers’. It seemed sensible at the time – at least to senior politicians who hope to get jobs in banks after they leave office. But dumping public money on the banks didn’t address the underlying problems: rampant speculation, neglect of the real economy, inflated house prices, the top 1% of society creaming off most of the wealth. Debt has been tackled by more debt. Inflation has been allowed to rip in the misguided belief that this will reduce the debt mountain. But inflation can promote even more borrowing because people realise that by saving they are actually throwing their money away at the rate of 5% a year. There’s no money left for any Gordon Brown-style fiscal stimulus – the banks got all the cash available and they’re holding onto it.

However, amid all the darkness and panic, there has been one ray of light. Last week, the French president, Nicolas Sarkozy, and the German chancellor, Angela Merkel, proposed introducing a financial transactions tax, a version of the Tobin tax proposed 40 years ago by the economist of the same name. The idea is to calm markets by taxing the trillions that slosh around day by day in the international currency markets. Taxing this would discourage speculation and financial jiggery pokery; and create a pool of funds to bail out banks and countries which get into too much debt. The financial transactions tax has been rubbished by the City of London, which stands to lose out, but it is a very good idea. Why should the taxpayer have to pay the cost of financial crises brought on by reckless financial engineering?

It is a version of the Federal Deposit Insurance Corporation introduced by Roosevelt in 1933. Bankers don’t create the wealth of society, they only move it around, so why shouldn’t society seek to claw back some of this wealth by taxing their money-making schemes? If Europe and America adopted the Tobin tax, the world’s bankers would probably have a collective psychological breakdown. But the world would overnight become a safer and a fairer place.