Bankers are horrible : But we need them

One of America’s biggest investment fund bosses, Bill Gross, shocked fellow Republicans last week by suggesting that he will vote Democrat in the presidential election. “I... think it’s time for a rebalancing of interests between the wealthy and less wealthy,” he said. It is interesting to speculate whether this outbreak of social conscience reflects humility, or merely the naked terror that is gripping the financial community.

The financial world is sailing uncharted waters. Nobody knows where the voyage will end, because they cannot work out the scale of irrecoverable liabilities.

A year ago, New York and London bankers shook their heads grimly over the fact that an estimated $1 trillion of supposed assets had vanished into space. Today the US taxpayer has accepted responsibility for the $5.4 trillion liabilities of the Freddie Mac and Fannie Mae mortgage businesses, without the remotest notion of how much of this money, too, will disappear down the Swanee. A mere trillion seems less serious money than it used to be.

Ordinary mortals who live outside the financial community are torn between delight at the humbling of the Masters of the Universe, who paid themselves fantastic rewards on the basis that only they knew how to manage capitalism, and awareness that we shall all end up paying for their failure. Half a century ago, the City of London was a quaint place which kept a few thousand rather dim ex-private schoolboys off the streets, and raised a little money for the real business of Britain — manufacturing ships, cars, textiles, washing machines and suchlike. Today, when the City’s activities account for around one third of GNP, the nation is frighteningly vulnerable to their frailty. The first good reason for not succumbing to schadenfreude about the financial catastrophe is that it highlights alarming issues about what Britain will live off in the 21st century. Our manufacturing base has moved east, never to return. A couple of years ago conventional wisdom held that this need not prevent us running a successful economy founded on services: tourism and suchlike; intellectual property (thank goodness the world works in English); and financial expertise, in which we were assured that we had no peers.

Today matters look rather different. Beyond the vast sums of money which the supposed wizards have lost, there is the question of reputations.

Hardly a single institution, or its bosses, have emerged unscathed from the carnage.

Businesses such as Lehman Brothers and Merrill Lynch borrow stupendous sums in wholesale money markets, and use them to place bets in a fashion indistinguishable from punters at Newbury racecourse or in Las Vegas. Worse, at least in a horse race you can see the animal on which you stake your little all. In the City and on Wall Street, by contrast, billions have been wagered on financial instruments of a complexity beyond the understanding even of those who invented them. A wise financial journalist said: “The first rule of investment is not to put money into things you don’t understand.” The kings of the market have been proved wrong. Unless the US and Britain want to go through this nightmare again in a few years’ time, it will be made more difficult for banks to expose themselves to risk so recklessly.

Yet it would be naive to suggest that it will be easy to get a new dispensation right. Market capitalism has delivered amazing prosperity to the west. Curbing its excesses without destroying the conditions for future wealth-generation will be tough. The bankers, market makers and hedge fund overlords have been insufferably arrogant in their decades of triumph, and nemesis is their just reward. But it will be flagellatory if, in our desire to punish the architects of systemic failure, governments introduce measures that stifle growth.

Rather as we must keep wanting to see Iraq stabilised, even if this might seem to vindicate George Bush, so we have to continue reminding ourselves that we need Wall Street and the City of London and some of their admittedly horrible people. There Is No Alternative, as Margaret Thatcher liked to say, sometimes rightly. There may be an important lesson in the experience of Goldman Sachs, the big house least tarnished by recent events. Commentators suggest that one reason for this is that Goldman’s traders rely more heavily on their own funds, and less on other people’s, to place big bets.

To keep our children in work and our society relatively prosperous in the decades ahead, amid the huge transfer of wealth from old to new economies, the financial services industry will be indispensable to Britain. The next generation of money moguls will probably prove as hubristic as this one has done; arrogance is seldom separable from riches. The highest aspiration, I suspect, will be to ensure that next time around, on the Goldman Sachs model, Masters of the Universe gamble with less of our money and more of their own. — The Guardian