Is there a cure for capitalism?
21st September 2008: Article for The Sunday Times by Jesse Norman
"Is there a cure for capitalism?" Two years ago this question would have seemed unthinkable. Now, after a week of extraordinary financial turmoil in which many proud banking names have ceased to exist, it is almost fashionable. Yet, when the dust has cleared, what should we conclude?
First, we should note the flatfootedness of the government's response. Messrs Brown and Darling have rammed home the lesson of their own incompetence once again by chasing financial events and presiding over the forced and anti-competitive merger of HBOS and Lloyds TSB—fittingly, on the first anniversary of the Northern Rock fiasco. The contrast with the Americans, and with the French in their handling of the $7 billion loss at SocGen earlier this year, is marked.
Meanwhile the Liberals have had almost nothing to say. On the contrary, they have been busy U-turning on the only two things anyone ever knew about them—tax more to do more, and Europe—in favour of a non-credible rightward shift supposedly designed to win more, er, Labour seats in the North.
In other words, just at the point when the country is crying out for new economic ideas, indeed a new economic perspective altogether, the Liberals can't stop talking about tax cuts. Keep an eye out for the Maginot Line in their defence policy.
For their part, the Conservatives understand that the worst thing of all would be a general reaction against markets as such. Of course there are specific causes of the present financial crisis. But there are also far deeper issues at stake.
Start with the specific causes. These include President Clinton's Community Reinvestment Act of 1995, which pushed US lending institutions heavily into promoting "subprime" loans to non-creditworthy borrowers. And they include Gordon Brown's decision to remove banking supervision from the Bank of England in 1997. This action almost caused then-Governor Eddie George to resign. He could see it would result in a disastrous loss of institutional experience, and dispersion of responsibility and knowledge among different regulators, as it has done.
But we must also look at the whole history and institutional structure of our financial system. The old financial order had many weaknesses. Crucially, however, its institutions had clearly defined roles. The commercial banks and building societies had capital from depositors and investors, but took as little risk as possible. The brokers and merchant bankers were advisers and agents. They acted on behalf of investors and corporate borrowers, who took the risk and made the returns or losses.
The beauty of the whole lay in the different and inter-locking roles of the various players, and the more-or-less successful minimization of conflicts of interest. And this was helped by the different institutional forms involved. The banks were companies, because they needed shareholder capital to sustain their balance sheets. The building societies were mutuals, because the mutual form facilitated the extension of credit to the less well-off.
The brokers and merchant bankers were partnerships, because they did not need much capital and knew that their partners would guard their own funds far more zealously than those of any outside shareholders. Why is Goldman Sachs virtually the only major US investment bank to remain unscathed by the latest disruption? In part because it most retains the partnership ethos. It's not uncommon for a junior trader at Goldman who's lost money on a deal to look up and see his boss working out the effect on her personal net worth.
But look now at the financial markets, and what do we see? The original roles of these institutions have been submerged in a huge wave of capital. Conflicts of interest are massive and endemic. Partnerships have disbanded. Building societies have demutualised. And thus the pluralism and diversity of their institutional forms have been replaced by one monopoly form: that of the shareholder corporation. Our financial markets have been damagingly corporatised.
And there is a deeper issue here. We are on the brink of a recession. But it's not just about economics. It is about society: about protest against globalisation, about anger at the spread of "clone-town Britain", about loss of national identity and local control, and about public concern at the spread of consumerism and a money culture. It seems to many people as though we are in the midst of a culturally unsustainable corporate capitalism, yet one to which there is no alternative.
The real question is not What is the cure for capitalism? It is What kind of capitalism do we want? We have reached the limits of state control and top-down government. The Conservatives are well advanced on a transformation in policy, based on ideas of social responsibility and fraternity. But as a country, we need something bigger from the centre right. We need a new political economy: a compassionate economics to fit alongside David Cameron's compassionate conservatism.
