Ann Pettifor

Once again: the dysfunctional banking system

Dear patient readers: apologies for another long absence. I have been travelling and working in Africa, and have just not had the time – nor the bandwidth – to blog.  Plus, I have found micro-blogging – via Twitter in particular – a satisfying way of staying abreast of developments, as well as logging and archiving both the insights of others and my own comments. I have also joined Google + having despaired of Facebook. The Goldman-Sachs-powered IPO was the last straw. Not an entirely rational reaction, for sure, but I am of an age where my gut instinct increasingly prevails.

I am posting here my contribution to the New Statesman ‘Staggers’ Blog today: on the absurdity of the IFS’s economic analysis, and the malfunctioning of the banking system. Back again soon.

“The humiliation of Fred Goodwin may have appeased a public baying for vengeance, but has done little to fix the broken global banking system or reverse the Second Great Depression. But then the public have been given very little leadership as to how to address the causes of this crisis.  Politicians, economists, central bankers and think-tanks have both created an almighty mess, but also sown confusion as to the true reasons for catastrophic economic failure. Instead the public have deliberately been blind-sided, distracted into focussing on a) the public sector and b) a consequence of the crisis: the public finances.

Fred Goodwin’s hounding shows that while you can fool the people some of the time, you can’t do so all of the time. Nevertheless, stripping Goodwin of his knighthood does not fix the banking system, or help the economy recover.

Last week Jonathan Portes of the NIESR helped subvert some of the propaganda by boldly speaking truth to power. To the consternation of many he showed that the ongoing slump is now longer and deeper than the slump of the 1930s. While the players in stock markets remain unmoved by this truth, it unnerved the establishment and all those who insist on a disastrous form of economic bloodletting: austerity.  These economic ‘quacks’  include MPs in all three major political parties; their friends in the City, the press and economics profession – and not forgetting those at the Institute for Fiscal Studies. Only a year ago the IFS followed the herd and urged the Coalition not to soften its stance on austerity. Now as contraction crushes the life out of the economy, hurts the poor and families with children, the IFS makes a mealy-mouthed appeal for “a significant short-term fiscal stimulus”.  That IFS economists are not embarrassed by the contradictions and absurdity of their analysis is disturbing.  That they remain unchallenged can only be explained by the sustained ideological drum-beat that drowns out sound economic analysis.

The Bank of England helped silence some of this propaganda when it issued figures last week which show, unsurprisingly, that neither austerity nor massive taxpayer bailouts have restored the British banking system to solvency. In the absence of major re-regulation, it remains dangerously dysfunctional.

Banking systems exist to lend money into the economy. Not so today’s. British banks are so over-leveraged (i.e. insolvent) that they cannot fulfil their role as lenders. Instead of acting as a lending machine, the British banking system, bizarrely, is now a borrowing machine. Like giant vacuum cleaners, banks are hoovering up the nation’s public and private resources, while refusing to lend, except at high rates.

The BoE data shows that banks siphoned up £11bn more from the real economy than they lent to firms last year. And to compound the damage, bankers borrowed from the nationalised Bank of England at rock-bottom rates, and then lent to firms at high and rising, real rates of interest. This helps explain the ongoing slump that characterises the Second Great Depression.  Banks are charging a whopping 20% for authorised overdrafts – and rates are set to rise higher. Despite this massive spread, they are still not raking in enough to clean up their balance sheets, render banks solvent, and start lending again.

And still government and the official opposition turn a blind eye. Neither proposes to radically re-structure and re-regulate Britain’s broken financial system – to subordinate arrogant bankers to their proper role in the economy, and to restore stability.”


6 thoughts on “Once again: the dysfunctional banking system”

  1. How to break the fraud of Bankers? We just refuse to play their Ponzi scheme. We withdraw our deposits from the banks and invest in physical assets like gold, silver, farm land, etc. The fraudulent fractional reserve banking system will just collapse.

  2. Austerity may be helpful against climate change. It may be the only remaining tool against it. The faster the economy goes bust, the better. It does not necessarily bring chaos, it may bring more centralisation of power. Which again is good for the climate.

  3. Good imagery with the banks hoovering up debt. So are they just borrowing like crazy to pay their staff and their bills and holding out hopes that there returns will catch up?

    What are they borrowing all that money for?

  4. Ann,

    Banking systems (banks) exist to lend money into the economy _wisely_.

    Unfortunately, it seems that banks have unwisely lent too much money into the economy (into ponzi schemes like residential real estate). How can the system be fixed and make the banks lenders again without somehow undoing the mistakes of the past? What I’m getting at is that credit needs to be withdrawn (somehow) before lending can continue again – with a consequential fall in the price of residential real estate.

    Personally, I get scared when folks talk about fixing the system by getting banks to lend again. After more than a decade of personal austerity and careful saving with a view to waiting to buy a house when the bust comes, it would be truly life destroying if the banks were simply continually propped up in order to get them lending again and somehow continue the ponzi scheme for further decades. It does seem that this is the path the UK has taken (particularly the QE taken up by Mervyn King and the BoE – and with what appears to be no ethical qualms at all).

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