Will Hutton: Curb the greedy global financiers

While obeisant governments bail out dodgy plutocrats, it's ordinary people who foot the bill

By Will Hutton
The Observer, London
Sunday, August 26, 2007

http://business.guardian.co.uk/comment/story/0,,2156599,00.html

One of the most inequitable and amoral acts in modern times is happening in front of our eyes and in Britain there is hardly a murmur of protest. The multi-billion dollar bailout of global finance after one of the most reckless periods of lending and deal-making since the late 1920s is extraordinarily one-sided.

Little people's taxes are underwriting the mistakes of big people, who in the process have made riches beyond the dreams of avarice. Globalisation, it is now clear, is run in the interests of a global financial class which has Western governments in its thrall. This class does not give a fig for the interests of savers, clients or wider workforces.

The rules of the game are set up solely to benefit the financiers whether in London, New York, or Hong Kong.

The nonsense at the heart of the crisis -- lending 100 per cent mortgages to borrowers with no income, employment, or assets, packaging up the resulting debt and selling it to banks around the globe while taking a handsome fee on every transaction -- can be launched with impunity. Financial regulation, we are told, hinders the efficiency of financial markets.

But now that it has become obvious that the mainly American borrowers have neither the capacity nor intent to repay any of the mortgages in an era of higher interest rates and stagnating house prices, there is justified panic at the wider consequence of the global system holding trillions of dollars of valueless debt.

The last few days have seen some recovery in the financial markets and some hopes for a return to normality, but what does normal mean? The system that has delivered hundreds of billions of dollars of written-off loans with a global impact can hardly carry on as if nothing has happened. The banks at the epicentre of the crisis should go bust and heads should roll. The hedge funds which bought the debt, traded it and sold it on to banks globally should also be allowed to go bust and be subjected to much closer surveillance and regulation.

Interpol should make arrests in New York, London, Tokyo, Beijing, Frankfurt, and Paris, starting with all the executives in the credit-rating agencies who blithely ranked the debt as creditworthy in exchange for fat fees and freebies from the very banks who were making the absurd loans. Governments should bring suits against the executives involved, the repositories of vast personal wealth, to help repair the hole in private and public balance sheets.

Instead, most central banks and governments across the West are straining every muscle to limit the fallout, assure banks and hedge funds that there is limitless public money on tap and that governments' first aim is to get back to "normal."

The explanation is obvious. The Western financial system is too important to be allowed to implode; credit is any economic system's life-blood, and if the supply lines get gummed up because of a collapse of confidence and severely punctured balance sheets, everybody suffers.

Quite right, but at least we can be careful in future about the terms on which supportive cash and potential bail-outs are made, as well as drawing larger conclusions about the nature of the implicit contract between finance and society.

Unbelievably, the European Central Bank has made hundreds of billions of euros available to all comers within the European financial system at no penalty for the privilege, while the Federal Reserve Bank in the US has lowered the interest rate at which it supports distressed banks. It is as though Europe and America had announced an amnesty to the world's criminal gangs after they had gone on a killing spree because they feared the killing would get worse.

The Bank of England alone has held the line, insisting that anybody turning to it for cash as a last resort will have to pay at a rate of interest that will hurt the borrower. Good for the bank, except that its stance is undermined because outside the euro zone it cannot insist that the European Central Bank follow its stance. It is also undermined by a British government that on these matters is the most craven in the West.

For as the German and French governments along with senior American Democrats argue, the whole affair raises fundamental questions. It cannot be right that finance insists on freedoms and lack of regulation to indulge in anti-social recklessness in order to make personal mega-fortunes, but when things go wrong to ask for government bailouts with no questions asked.

Thus Chancellor Angela Merkel and President Sarkozy have called for more transparency and regulation of hedge funds; thus in Brussels and Washington, there are to be investigations into what the executives at the credit-rating agencies have been up to. But from the British government there has not been a peep, not a hint that the contract between finance and society needs to be reassessed both at home and abroad. That would be -- heaven forfend -- "anti-business."

But the West's economies and societies cannot be constructed as if their sole raison d'etre is to ensure that there is a steady flow of deals for investment banks, private equity houses and hedge funds, along with an abundant flow of credit, and the moment there is any interruption governments bail them out. Finance is hardly poor. In "Richistan," his revelatory book about today's mega-rich, Robert Frank shows how closely enmeshed instantaneous wealth and the financial markets have become.

Gordon Brown runs a government that is essentially conservative over business, opposed by an opposition yet more conservative, with the Liberal Dems terrified to rock the conservative consensus. Over the last few years there has been a fire sale of British assets to foreigners, together with ever-closer entanglement with the American debt markets to sustain the bonuses of the financial community. It would not surprise me if, before the story is over, at least a couple of household British financial names have to be offered a lifeline.

Somebody, somewhere must start blowing the whistle. The Americans at least take capitalism so seriously that they challenge, monitor, and regulate it. No such culture exists in degenerate Britain. We need a party wthat will speak for an interest other than self-interested, amoral plutocrats. None exists.

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