The government should use its shareholder position in the newly recapitalised banks to push for proactive change from within – This article was first published at http://www.guardian.co.uk/commentisfree/2008/nov/21/banking-crisis.
In early November, representatives from 20 different organisations from around the world gathered in Spain as part of the BankTrack network to lay out a response to the banking crisis. The resulting El Escorial statement on banking and the financial crisis made a number of common sense recommendations as to the practical steps that need to be taken to provide a more stable, equitable and democratic banking system in the wake of the recent economic upheaval. In contrast, the UK government is planning to essentially let the banks get on with it, but using public money this time.
More than a month after it was announced that British tax-payers would be stumping up billions of pounds to bail out the banks, the two men responsible for overseeing the public investment, Philip Hampton and John Kingman, announced in an article in the Financial Times that they “must operate on a commercial basis at arm’s length”, and will act only “to manage the taxpayer’s investments, not to manage the banks”.
This “arm’s length” approach amounts to a monumental cop-out on the part of the government and a nigh-on unconditional bail-out for the beleaguered bankers. The banking crisis has clearly highlighted the fact that left to their own devices, financiers will always recklessly career down the road of short-termist profit maximisation.
While we wait to see what form the government’s re-regulation of the banking sector will take, it could and should use its position as a shareholder in the newly re-capitalised banks to push for proactive change from within. The arm’s length approach is effectively more of the same, when what is necessary is for the state to have a more “hands-on” approach.
The current crisis is not only an economic and financial crisis, but one of governance and the government could play a key role in addressing this issue through its probable majority stake in the Royal Bank of Scotland.
Such a role could curtail the massive “shadow banking” boom in hedge funds and derivatives, which largely serve no social function other than to make the rich even richer. Capital needs to be taken out of this “casino economy” and redirected to the real economy in order to meet the needs of society regarding sustainability.
In today’s carbon-constrained world, this financing of the “real economy” needs strict regulation as to its climate impact. The government has been pushing for its clean energy investments abroad to be counted towards its EU renewables targets. This is a fudge, and is not likely to help carbon accounting, but it is noteworthy that the government has not volunteered to correspondingly count the emissions from its dirty energy investments (such as those financed by RBS) overseas against its Kyoto targets.
In October alone, among its many instances of project finance, RBS took part in a $500m loan to Great Plains Energy, a US power generator whose coal-fired plants emitted 26.5 million tonnes of CO2 in 2006. October also saw RBS subsidiary bank ABN-AMRO facilitating a loan to the highly controversial “tar sands” extraction in Alberta, Canada.
Critics say that intervention from the government would discourage investors from purchasing the shares from tax-payers in the future, but banks such as the Co-op and Triodos, both of whom have ridden out the crisis relatively smoothly, have demonstrated that ethical lending policies can be attractive to investors.
The threat of climate change calls for a broader interpretation of public interest in the context of the massive public investment that has been made into the ailing banks. The Green New Deal being proposed by the New Economics Foundation and the Guardian’s Larry Elliott, among others, calls for massive public spending to bring about the urgently needed transition to a low-carbon economy. The public could shortly be the majority owner of a financial institution that could play a key role in the Green New Deal if the government was willing to spend a fraction of the amount of political will that it took to bail out the banks in the first place. The widely touted interests of the tax-payer as shareholder would be much better served by creating a more climate-secure future than by the short-term inflation of RBS’s profit margins.