Tuesday, 23 June 2009
Why consumer protection must spur the financial recovery - Part one
In a two-part blog feature ahead of a major UN summit on the global economy, CI’s Senior Policy Advisor, Robin Simpson examines why consumer protection must spur the financial recovery.
Here in part one he looks at why a lack of consumer protection precipitated the financial crisis. In part two he goes on to show how consumer rights must be at the heart of the recovery.
‘Banks took the opportunity to use the cheap funds provided by their retail depositors to speculate in global capital markets.’
‘”Perhaps there were a dozen people in the bank who really understood all this before (the collapse) – I doubt it was more”, one senior Citibank manager recalled bitterly.’
‘If experts are unable to understand the fee structure, what chance is there for ordinary consumers?’
‘Who said that?
The first comes from John Kay, past occupant of a chair at the London Business School; the second from Gillian Tett, award-winning journalist from the Financial Times and the third from European consumer affairs commissioner Meglena Kuneva.
Given such grave criticisms from such eminent sources it is astounding that banks have received guarantees and bail outs that dwarf the kind of sums that we have been told for years are unavailable for far more needy causes.
For example, the Public Services International Research Unit calculates that for only 5% of the guarantees given to the banks by December 2008, three quarters of the urban population in developing countries could have been connected to water and sewerage. For years CI and its members have campaigned on such basic services and debated the rights and wrongs of whether revenue to pay for such vital services should come from taxation or from consumers’ own pockets.
Yet last year vastly greater sums were made available within a matter of weeks to cover the banks failures.
Competition rules were overridden to allow vast mergers to go through to prop up financial markets, steps that are creating new monopolies. Unsurprisingly banks share prices are now rising.
When developing countries get loans from the World Bank or the International Monetary Fund (IMF), they have to meet strict conditions. Strict tender rules are often imposed. Where is the conditionality governing the banks? Such taxpayer bail outs, which may well result in the depression of other public budgets such as social security or development aid, can only be justified if the retail banks make strenuous efforts to extend financial services to the excluded consumers and investment capital in socially necessary infrastructure services like water, sanitation and electricity.
Bank rescue plans which separate out losses and hand them over to the taxpayer as a poisoned chalice, eg the US toxic asset plan ($300billion, yes billion not million), could be said to achieve the worst of all worlds. They burden the state with the worst performing financial services (socialising losses), while leaving the more sound banking assets in the hands of those who got us into this mess (keeping profits private). No wonder bank shares are rising!
Bernard Lietaer of the University of California argues for nationalising distressed banks in their entirety. Due to the capacity for leverage of their sound portfolios, he calculates conservatively that it is ten times more effective for governments to bolster the balance sheets of banks directly through buying bank shares than to buy toxic assets, which in any case are almost impossible to value. That process of valuation leads either to further rewards for incompetent banks in the event of over-valuation or negligible impact on banking finance in the event of under-valuation.
Majority ownership of banks could allow for conditionality for public policy goals. Interference? Yes absolutely, but the US banks have welcomed over $300billion worth of interference in toxic debts with open arms (and that is but a fraction of the total rescue). And we have political interference already. The US government put pressure on four rescued banks to accept only 29 cents on each dollar of Chrysler’s debt. The UK government put pressure on Lloyds to take over struggling HBOS. Political pressure is inevitable at such times and rightly so. Let us turn it to good effect. How about rescue for the German lander (provinces) responsible as they are for many public services, that are struggling as a result of holding toxic assets. What about debt forgiveness for public utilities in debt to commercial banks and facing the cost of rising environmental standards? What about the cancelled infrastructure investment programmes worldwide? These can return money to the taxpayer in due course while serving a higher moral purpose than boosting bank shares.
What about universal banking services? If interference is the order of the day let it be a programme, open to scrutiny.'
To be continued… keep an eye out for part two.