Friday, August 10, 2012

Global finance industry: Five years on

Standard Chartered: The "good" bank
by Michael Roberts

It is almost exactly five years since the global banking collapse began with the news that the French bank BNP had suspended its sub-prime mortgage funds because of “an evaporation of liquidity“.  The credit crunch had begun, leading to the Great Recession of 2008-9 and now the Long Depression.
Now Robert Shiller has published a new book,  Finance and the Good Society, in which he argues that, even after the crisis, rather than condemning finance, we need to reclaim it for the “common good” (see the interview in May 2012 (  Banks are not all bad.

Robert Shiller is a prominent economist in the US.  The important Case-Shiller US house price index, which he jointly constructed, is named after him.  The index has been a much better indicator of the state of the US housing market than the official indices.  And Shiller was one of the few economists to be ahead of the game in forecasting that the US housing market was in a bubble and heading for a deep fall.

Shiller is a leading proponent of the Keynesian concept of ‘animal spirits’ being the driving force for boom and slump in capitalist society.  Indeed, he wrote a book called just that at the depth of the Great Recession along with George Akerlof (see Shiller’s home page at  Both Shiller and Akerlof are supporters of what is fashionably called ‘behavioural economics’ i.e. the changes in a capitalist economy can be best explained by changes in the unpredictable behaviour of consumers and investors.  That sets off a chain of connections for the demand for money, in investment decisions and in spending.  This is the inherent flaw in a modern economy: uncertainty and psychology.  It’s not the drive for profit versus social need, but the psychological perceptions of individuals (for more on this, see my paper, The causes of the Great Recession).  Thus US home price collapse came about because consumers’ ‘animal spirits’ gave way to a bias towards precaution and savings as debt mounted – just like that.

Five years on from the start of the global banking crisis, we read ever yet more about the unending litany of mistakes in ‘rogue trading’, deceipt and corruption that was and is still going on in the major banks of the world.  The latest ‘stone to be turned over’ as RBS chairman Stephen Hester recently put it, is Standard Chartered Bank.  According to the previously little known New York State Financial Services regulator, this British-based bank, a paragon of virtue in the eyes of the City of London, has been engaged in years of deceit and illegal activity against legal sanctions by moving Iranian bank money around the world.

Standard Chartered is regarded as one bank that kept out of the sub-prime crisis and the other speculative messes, because its main activities are in Asia, Africa and the Middle East and not in Europe, Japan or the US.  It just published its annual earnings report, with healthy profits and a smug view from its chief executive, that the bank’s activities were boringly safe because it was so virtuous.  Well, not according to the New York state financial regulator.  In a 27 pp report (, the regulator found that over a decade Standard Chartered deliberately and systematically laundered bank transactions worth $250bn for various Iranian banks in violation of the international sanctions against the Iranian regime.  According the regulator’s report, the bank reaped “hundreds of millions of dollars in fees”, while “it left the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity”.  When this activity was questioned at one point, the bank’s UK executive director responded: “Who are you f**** Americans to tell us, the rest of the world, that we’re not going to deal with Iranians.”

There is now a public relations campaign designed to dismiss the findings of the New York regulator.  First, Standard Chartered says that the regulator has got it all wrong and only about $14m was illegally transacted over the years – so that’s all right then!  Then the story is that the New York regulator is a piddly upstart not to be mentioned in the same breath with the mighty Federal Reserve or the US treasury which have not complained in public about Standard Chartered’s activities.  The head of the New York regulator is just doing this for publicity and electoral advantage with upcoming polls.

The US treasury knew about the bank’s’ Iranian transactions but it was dealing with the bank behind closed doors – apparently, these sorts of things should not be brought into the open.  It is better that they are dealt with in a nice Wall Street clubby atmosphere in case it damages the reputation of the bank and banking in general(!). The New York regulator has not kept to ‘club rules’ and the result has been a 25% drop in the bank’s stock price.  Finally, there is the accusation that all these recent revelations about Barclays (Libor), HSBC (drug laundering) and now Standard Chartered are an attack on the City of London by devious Americans trying to establish New York as the prime centre of finance  capital.  It’s an American plot!

Well, be that as it may, it’s just another example of how banks brought down the world economy and yet continued with their speculations, tricks and grotesque rewards for profit against ‘the common good’ (Shiller) and even against the laws of US Congress.

And that brings me back to Robert Shiller’s new book.  Shiller tells us the “the problem is, and this is what’s bothering people these days, a strictly for-profit corporation just seems selfish. And it is selfish, because focusing directly on profit is just not humane.”  Shiller pleads to bankers that “when you think of finance, you come to it thinking “Make money! Get rich!” You should instead think about financing activities, things that people do together that are important to them. Achieving goals that are shared by groups of people. Financing activities is what it’s all about.”

How true, but how is that to be achieved in the world of modern finance capital?  Shiller says in his book that we need a new kind of financial corporation that he calls a ‘benefit corporation’.  Apparently it is “halfway between profit and non-profit”. The benefit corporation makes profits and distributes them to shareholders just like a for-profit corporation. The only difference is that the corporate charter specifies a purpose – a social, environmental or charitable purpose – in addition to the profit-making purpose. If such banks are set up “I think everyone will feel better”.

The sheer utopianism of Shiller’s idea shows how desperate he is to restore the reputation of modern banking with ‘ethical banks’.  It is a dream.  We have had ‘ethical investing’ for some time now, with investment funds dedicated to investing in the ‘right things’.  But even that limited step has not changed the system one iota.  The idea that major banks like Standard Chartered or Barclays are going to introduce an ethical or social clause into their objectives is laughable.  Remember that Standard Chartered is supposed to be the world’s most ethical global bank!  Surely, if you want banks to operate in the interests of society and not for profit, public ownership with democratic control in a national plan for economy is the most obvious, coherent and practical way?

For Shiller, apparently not.  He criticises the Marxist view specifically (perhaps because he sees that it is gaining traction).  Shiller says: “The criticism that Karl Marx advanced of capitalism, in a nutshell, he said the capitalists dominate because they own the capital. And the other people, the working class, have no access to capital.”  Shiller rejects this view because “as modern society becomes more inclusive, everyone who becomes knowledgeable about finance can have access to capital. You don’t have to be born rich; we have a mechanism that allocates capital, that’s the financial system at its best use.”  Really, can anybody set up a bank and make it work on an ethical basis so as to allocate capital in the interests of society?

Shiller says yes.  You don’t have to be rich to “develop a business plan and present it to a venture capitalist… In the modern economies I think they really don’t care what social class you came from. You could be very working-class and, before you know it, you have millions of pounds to allocate, and that is the way that it’s increasingly working. That is the fundamental flaw in Marx’s thinking. He thought that these social classes were permanent and hopeless. We’re learning that it’s not. We should seek more progress, more democratisation of finance in the future.”

But Marx’s point was not that financiers would not take a good idea for profit from a working-class person.  Of course, they would.  The point was that the owners of capital control the allocation of society’s resources and do so on the basis of profit, not social need, which is only an accidental by-product in the best case, or completely destroyed in the worst case (as over the last five years).
The ‘democratisation of finance’ is yet another illusion from the apologists of capital, just like the ‘shareholding democracy’ (where the top 10% of US households own over 80% of share wealth), or a ‘country of home owners’ (look where that got America!)

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