Recovery before Reform

LONDON – The financial crisis that started in 2007 shrunk the world economy by 6% in two years, doubling unemployment. Its proximate cause was predatory bank lending, so people are naturally angry and want heads and bonuses to roll – a sentiment captured by the current worldwide protests against “Wall Street.”

The banks, however, are not just part of the problem, but an essential part of the solution. The same institutions that caused the crisis must help to solve it, by starting to lend again. With global demand flagging, the priority has to be recovery, without abandoning the goal of reform – a difficult line to tread politically.

The common ground of reform is the need to re-regulate the financial services industry. In the run-up to the crisis, experts loudly claimed that “efficient” financial markets could be safely left to regulate themselves. Reflecting the freebooting financial zeitgeist that prevailed at the time, the International Monetary Fund declared in 2006 that “the dispersion of credit risk by banks to a broader and more diverse group of investors…has helped make the banking and overall financial system more resilient…” As a result, “the commercial banks may be less vulnerable to…shocks.”

It is impossible not to hear in such nonsense the cocksure drumbeat of the Money Power, which has never failed to identify the public interest with its own. For 50 years after the Great Depression of the 1930’s, the Money Power was held to account by the countervailing power of government. At the heart of the political check was America’s Glass-Steagall Act of 1933.