On balance, the response of politicians, supervisors and other policymakers to making sure that financial market crises like the one which is seemingly waning do not occur in the future has been disappointing.
While strong announcements were made a year ago, steps by the G-20 and national governments, national banks and supervisory authorities in the meantime have been baby steps at best.
Politicians? – Beholden
Numerous accounts have appeared of how the political processes in the developed world are beholden to the interests of the financial sector. The revolving door practice of US treasury secretaries and their policy peers and underlings, the political influence of Länderbanken in Germany, of party-political and Länder-political instrumentalizations in Austria, the close connections of UK financiers and politicians – to name just a few – all these make sure that the gigantic sums which taxpayers provided for banks and bankers remain a one-way business. With such history: Can we rely on politicians to cut the financial sector down to its welfare-enhancing financing role? Hardly.
The Courts? – Which Side Are They On?
Most recently, another blow has been dealt to the suffering taxpayers who would expect that they are not the only ones to bear the burden of overcoming the crisis. Yesterday (Nov. 25, 2009) the newly-installed Supreme Court in the UK decided against a claim brought forward by the Office of Fair Trading, that the 2.6 bill Pounds in fees banks have been charging their clients for unauthorised overdrafts were not illegal. To be clear: these fees are charged above the exorbitant overdraft interest rates, quasi as an additional punishment for going into overdraft. Estimates state that at most half of that sum could be explained by costs.
This news comes on the same day when it was revealed that the Bank of England last fall extended so-far not communicated 62 bill Pounds to Lloyds and RBS last year to keep them from failing.
But the sad story is that also the Courts seem to be on the side of banks, instead of on that of customers = clients = taxpayers.
So on whom can we – the footers of gigantic bills for saving the banks – rely to prevent further excesses? The legislative, the executive and the judicial sectors of government are “on the other side”.
Civil Society: the Only Instrument Left
It seems to me that we as taxpayers, clients and citizens have to take this matter into our own hands. After all – as the Dresden citizens so bravely stated during their Thursday demonstrations twenty years ago: Wir sind das Volk!! WE ARE THE PEOPLE!
We need to develop grassroots, civil society, organizations to force supervisors and politicians to take our interests into account and have the burden of the crisis shared equally, take significant steps to reduce both the size of individual banks as well as of the global financial sector as a whole, to eliminate incentives for trading and speculation, to revert banks companies to their original mission – turn savings into productive investment – and no more. We need to monitor their activities, we need to make sure they are accountable and take only calculable risks, we need to make supervisors do their allotted job.
A good starting point for such grassroot supervision would be the organizations which have formed as class action suits against individual banks. With the help of lawyers and former financial and banking experts such groups could turn into more permanent organisations which are powerful enough not to be silenced by counter-claims by banks with their super-highly-paid law firms.
Kurt Bayer's Commentary 
I think before we talk about who could be able to fix structural deficiencies, we should approach from another angle: what could be an institutionally feasible mechanism capable of this? Restructuring and adding to previous posts, possible solutions to the prevailing power imbalances (not only concerning financial sector issues) may be:
– Use of legal instruments against power concentration. Abolishing personal rights of corporations will (unfortunately) be a too radical step to be implemented. Efforts of the EU commission to make active use of antitrust legislation is a (small) step in the right direction to curtail accumulation of power.
– Establish an institutionalised counterpart to balance corporate power. This might be done in the form of an inspection panel-like body, or an improved governmental separation of powers (checks and balances), or a formal integration of NGOs into governance processes (but how should they be chosen?), or maybe something completely different. This has been in discussion for decades now – up to now, with little success.
– Create some kind of informal power of the public to fight structural problems by amounting pressure on policy makers. This is probably the most difficult mechanism to use as a counterpart to corporate lobbying, since public mobilisation usually occurs around single events and has thus a temporary character, whereas corporations use their influence permanently. However, new communication technology has opened up new opportunities to mobilise many people in virtually no time, as has been shown for example in Madagascar or during the election campaign of Obama. This is a promising development, which needs further efforts by civil society organisations to use the potential of this instrument to full extent.
What all approaches have in common in order to be successful, is the need for global and international action. The major advantage of the “too big to fail”-companies is their multinational character, whereas the instruments and the power of regulators, governments, and civil societies combined are obviously still not international and global enough to withstand the influence of the corporate sector. Global liberalisation has allowed corporate power to consolidate globally, while citizens and their governments lag behind.
Interesting: yes, I agree: in some of my global governance proposals I also have the proposal to set up a global competition authority, mainly for counterweighing the power of FDI multinationals vis-a-vis host countries: frequently the economic leverage of mutlinationals outstrips that of host countries which then accept preferential tax treatment and many other benefits in order to attract multinationals.
I completely agree on the asymmetry of corporations acting globally and power-restrainign instruments being on a national level (if at all) – which needs to be corrected.
I agree with both of you. What would be practical ways to act?
Yes, we need more of what I call “accountability from below”.
The existing institutions (Parliaments, Courts, Press) seem insufficient. Reforms of these institutions are needed. But most likely we need additional institutions?
Kurt, you rightly argue for a stronger role of civil society. But with all that civil society around us in developed economies and their freedom of expression, why have we not seen more action to correct what is apparently going into the wrong direction?
One thought that has occupied my mind is that “regulation” in many sectors of the economy has been replaced by “codes/principles of conduct ” or “standards” which the various actors claim to honor. When the going get’s rough,however, these “standards” get often violated and only a portion of the resulting non-compliance can be tested in courts because the established norms have a largely voluntary character within a particular sector or a particular trade group. While competitive pressure among the actors ensures the adherence to these voluntary norms for some time, there seems to be an erosion of compliance over time.
The current tendency is to think of stronger regulation from the outside to replace weak or voluntary standards. This is certainly needed in some areas. But for a host of currently problematic circumstances it might be more fruitful (and efficient) to think of the innovation of agreements that complement the existing standards with the creation of “independent recourse mechanisms” to which civil society can bring their complaints more easily than to slow moving courts or unresponsive politicians.
My question: Is there a need and an opportunity to think of extrapolating the experiences of the World Bank’s Inspection Panel or of similar “recourse mechanisms” to other spheres of the political economy ?
Greetings,
Werner
Thanks Werner:
I think we did not see any action by civil society on financial regulation because most civil society organisations were concerned with “hands-on” issues, like civil rights, environment, social safeguards, etc. Financial doings have been “too abstract”. Of course, ATTAC has been active in this field.
It seems to me that civil society will have woken up to these issues of financial economics and regulation as being important.
I agree that in some cases such recourse mechanisms like the WB Inspection Panel might be helpful, but we need more “current monitoring”, not just ex-post things, because it might be too late then.
I am with you – our society can’t expect any help from supervisors and politicians.
I have thought long and hard about this mess, and I have come to the conclusion that the “root of all evil” is the fact that corporations have personal rights. Whose idea was this anyway?
http://en.wikipedia.org/wiki/Corporation
To quote F.D. Roosevelt:
“The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism—ownership of government by an individual, by a group, or by any other controlling private power.” (April 29, 1938 message to US Congress)
In my opinion, we don’t need to fix the financial sector, we need to stop corporatism. The sad truth is that, obviously, those who are in a position to change things are also those who are least interested in doing so.
Thanks, Stefan, I am with you – and thank you very much for the Roosevelt quote: had I known it, it would have fitted very well into my post.
I still think that there could be ways to control the power of corporations, both financial and non-financial, but the traditional ways of exerting power through elected officials – who fall victim to special interests – and may personally profit from them – are obviously at a dead-end. This is even more true in systems like the Austrian one where parlamentarians are claques for their governments rather than exerting a free mandate in the interest of those who elected them.
Power to the people!
Kurt