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Why Osborne is getting it right on banking

22 January 2010

4:45 PM

22 January 2010

4:45 PM

Oh dear. After Massachussetts, it seems like the usual sneering about "populist" politicians, and about voters who aren’t happy with the bankers, is back.  So here are a few facts of life for those knocking people who think the banking sector could still do with a lot of fixing:

1) The financial performance of the financial services industry over the past decade, in aggregate, has been shocking. Someone who had invested in the US or UK stock market would have seen their investment in real terms (net of inflation) fall by over a third. Shareholders have been brutalized for the best part of a generation now.

2) The last ten years have seen two of the largest equity market collapses in history – the dotcom bust and the bank collapse – and probably $4 trillion in bank lending losses. That is not the sign of well functioning financial markets.

3) Bubble after bubble has been inflated, generally with huge cost to end investors.


4) Shareholders who had invested in bank stocks with investment bank arms have lost a fortune. And remember: the stock market is not owned by guys in Bentley’s in Mayfair, but working people’s pension funds. Investment in banks represented a very significant part of people’s retirement savings.

5) Despite the shareholders getting nothing, the financial intermediaries have seen their incomes go through the roof.

Something is clearly – and massively – wrong here. The owners of capital keep losing, and the middle men keep winning. This is not the Anglo-Saxon capitalist model people felt they had signed up for. Above all else, the bank bailouts and subsequent bonus bonanza is fundamentally offensive to the US and UK culture that reward should be for success. The culture of entitlement that is being shown by parts of the banking sector here is reminiscent of 1970s trade unionism.

The totemic election result on Tuesday is a message to all politicians that enough is enough. Fundamental reform of the financial sector and promotion of shareholder interests is essential. When Thatcher and Reagan promoted much wider share ownership (a fundamentally good idea) they failed to see that politicians like Larry Summers and Gordon Brown (long very close to parts of the investment banking industry) would rig the market against the owners of capital.  If the financial sector is to provide huge value to the economy, and to its shareholders, then it needs to return to its pre-1997 market and shareholder-orientated structure.

This is not a “populist” reaction from the electorate.  It is a revolt of the shareholders – pension savers – who realise they have been getting shafted, and who have a perfect right to want things to be done differently.

It is to the credit of George Osborne that he was one of the first senior politicians to realise the importance of financial reform, and particularly returning to the principles of Glass-Steagall. Conservatives should own the issues of financial sector reform and shareholder rights. Thatcher created the first City Big Bang by recognizing the need to reform the vested interests and increase competition – the Cameron government should show the same determination and create Big Bang 2.


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