Thursday, October 28, 2010

Labour Government Unleashed Financial Destruction Frenzy

Another piece I did for Newsnet Scotland:

by Alex Porter


Having pressurised the chairman of the (FSA) financial regulator, Lord Adair Turner, to regulate with a 'light touch' and not to be 'heavy and intrusive' with banks like Northern Rock, Gordon Brown created the conditions for banks to indulge in reckless lending which then lead to the financial crisis.

In an article published last week in Angelaki: Journal of the Theoretical Humanities, Dr. Paul Crosthwaite of Cardiff University argued that bankers, used the regulatory holes encouraged by the former Chancellor and then Prime Minister Gordon Brown, to bring the financial system down for thrills.

Dr. Crosthwaite explains that bankers would only have dealt in sub-prime loans and related derivative products, inevitably resulting in catastrophic losses, if they unconsciously desired the thrill of destroying their own institution. The article called 'Blood on the Trading Floor: Sacrifice and Death in Financial Crises' comes almost exactly two years after the crash which brought about controversial bail-outs and nationalisation of many Western banks.

One of the principle causes of the financial crisis is that it is not banking executives who lose out when their banks run up losses but their owners – the shareholders and bondholders. The latter investors tend to be global financial institutions and it is they who were bailed out by former Prime Minister Gordon Brown. The cost was born by British taxpayers and the resultant crisis in public sector finances is being dealt with by David Cameron through austerity cuts.

Dr. Crosthwaite's research uses psychology to show why various booms and busts like the dot-com bubble are expressions of an inner urge for self-destruction, a process termed 'death drive' by the father of psychoanalysis Sigmund Freud. The author draws on a variety of sources such as research studies and even novels about financial executives to argue that there is a masochistic satisfaction in running up losses and that a complete crash causes euphoria as well as despair.

Others will argue that it is simply the profit motive that drove 'suicide bankers' to implode the financial system. With an intricate web of cross-ownership the financial system often seems to exhibit self-destructive behaviour. In the case of the latest crisis traders, who sold fraudulent financial products to their own clients then bet on their clients' share prices collapsing.

Whatever the reasons most observers will agree with Dr. Crosthwaite's recommendations that financial regulations be tightened to stem excessive risk-taking:

"To avoid a repeat of the 'great recession,' it's vital that policymakers and regulators limit the capacity of financial professionals to engage in excessive practices by curbing the disproportionate levels of risk that we've seen in the financial sector in recent years,"

Scottish Surplus

Scotland was hit very hard by the financial crisis with Royal Bank of Scotland based in Edinburgh being one of the worst effected global banks. The bail-out of RBS is controversial and Labour politicians in Scotland have argued that Scotland needed the umbrella of the UK during the crisis and could not have managed the bail-outs alone.

Last weekend the world renouned economist Andrew Hughes Hallett who has been a consultant to the World Bank, UN, ECB and the US Treasury among many other international organisations, central banks and governments emphatically refuted that argument:

"They [HBOS and RBS] have substantial activities in England as well as elsewhere and therefore the burden of bailing them out would have to have been shared in any case.

"..and there are plenty of precedents for that. The Dutch-French banks and the Belgium-French Banks that went bankrupt had to be bailed out jointly by the responsible authorities, and so it would have been shared."

It is a common misperception that the bail-outs compensated Scottish depositors but in reality taxpayers money was used to bailout institutional investors such as shareholders and bondholders who are mostly based in the City of London. In the case of an independent Scotland and England both governments would have shared responsibility based largely on the domicility of the effected investors.

Other economists like Mike Hudson argue that as investors invested their money without proper due diligence they have no right to expect taxpayers to assume their losses. If the electorate decides, during the hightened tensions of austerity cuts, that the bailouts were a mistake then the Labour Party would not only have to explain how they got Britain's public finances into such a parlous state but why they decided to bail out the banks at taxpayers' expense.

With the previous UK Labour government being blamed by Scots, according to the latest opinion polls, for the crisis the SNP will point to Labour's economic record and ask voters why they should trust a party to fix something that Labour themselves broke.

Last week, former World Bank economist and President Clinton key aid Joseph Stiglitz became an advisor to First Minister Alex Salmond. This latest move by Hughes Hallett who is Professor of Economics at George Mason University in Washington DC will support the SNP's case that while the UK's public spending deficit is ballooning it would be in voters' best interests to want to use Scotland's surplus to invest in jobs in Scotland through economic independence.

22 comments:

TartanSeer said...

Great post Alex.

Alex Porter said...

Thanks!

shuggie said...

Interesting post Alex. Labour still repeat the mantra that Scotland wouldn't have managed to bail out the banks in an independent Scotland. This ignores the fact that you mentioned about shared responsibility between countries and of course the fact that the UK is borrowing heavily from abroad to bail out the banks and cover the deficit !

A couple of typos..

lead should be led
born should be borne
effected should be affected
voters' should be voters
brackets missing on the sentence 'according to.....

Mr. Mxyzptlk said...

alex

a day to remember/regret?

1975: North Sea oil begins to flow
The Queen has formally begun the operation of the UK's first oil pipeline at a £500,000 ceremony in Scotland.


http://news.bbc.co.uk/onthisday/hi/dates/stories/november/3/newsid_2538000/2538155.stm

any comment

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