Following Ronald Reagan’s dictum, “Government is not the solution to the problem, it is the problem”, banks were allowed to unite under one roof activities that regulation had previously required to be divided between separate firms and banks. They were able to grow to sizes many times bigger than a country’s GDP – the assumption being that the market would be self-regulating. The changes also meant that bankers became immensely powerful.
But because the general public was left in the dark, there was never enough political capital to take on the banks. Compare this to the 1930s in the US, when the crash was allowed to play out, giving Franklin D Roosevelt the chance to bring in simple and strong new laws that kept the financial sector healthy for many decades – until Reagan and Thatcher undid one part, and Clinton and Blair the other.
Tony Blair is now making a reported £2.5m a year as adviser to JP Morgan, while the former US Treasury secretary Timothy Geithner and the former secretary of state Hillary Clinton have been paid upwards of $100,000 a speech to address small audiences at global banks. It is tempting to see corruption in all this, but it seems more likely that, over the past decades, politicians as well as regulators have come to identify themselves with the financial sector they are supposed to be regulating. The term here is “cognitive capture”, a concept popularised by the economist and former Financial Times columnist Willem Buiter, who described it as over-identification between the regulator and the regulated – or “excess sensitivity of the Fed to financial market and financial sector concerns and fears”.
With corruption, you are given money to do something you would not have done otherwise. Capture is more subtle and no longer requires a transfer of funds – since the politician, academic or regulator has started to believe that the world works in the way that bankers say it does. Sadly, Willem Buiter never wrote a definitive account of capture; he no longer works in academia and journalism. He has moved to the megabank Citigroup.
This then opens up the most difficult question of all: how is the global financial sector to be brought back under control if there is no global political authority capable of challenging it?
Seven years after the collapse of Lehman Brothers, it is often said that nothing was learned from the crash. This is too optimistic. The big banks have surely drawn a lesson from the crash and its aftermath: that in the end there is very little they will not get away with.
