Capitalism is in danger of self destructing unless bankers reject the ìheads-win-tails-you-loseî system which has marred the finance sector in recent years and accept that they have responsibility to form a fairer society, the Bank of England governor has argued.
In one of his most memorable speeches yet, Mark Carney told delegates at an inclusive capitalism conference in the capital that the banking industry was in danger of collapsing in the future unless bankers and financial sector representatives begin to adhere to the ethical standards required of people who hold such responsibility.
The governor argued that many banking officials both in the past and at present have applied a ìheads-win-tails-you-loseî system to their work which has resulted in them failing to uphold their role specified in the social contract and promulgating inequality across the globe.
And Carney called for banking officials who fail to adhere to the high ethical standards that are expected of them to be punished and ostracised if they are proven guilty.
“We simply cannot take the capitalist system, which produces such plenty and so many solutions, for granted. Prosperity requires not just investment in economic capital, but investment in social capital.”
ëFair markets, codes of conduct and regulatory obligationsí
In a eloquent and scathing critique of the conduct of city officials in the lead up to the economic downturn in 2008, Carney argued that market radicalism and minimal regulation had broken down the system of fair and equal capitalism at the same time as controversies such as the rigging of Libor markets created a sense of mistrust between consumers and the finance industry.
“Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself. To counteract this tendency, individuals and their firms must have a sense of their responsibilities for the broader system.”
“All ideologies are prone to extremes. Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith. In the decades prior to the crisis such radicalism came to dominate economic ideas and became a pattern of social behaviour.”
Mr Carney highlighted that BOE policymakers and financial regulators both in Britain and across the globe are seeking to devise and instigate measures that make the entire finance system fairer and reduce the chances of a future economic crash occurring through the implementation of reforms.
However, he also urged banking officials to take a leading role in changing society for the better, arguing them to function for the benefit of society and uphold financial stability in the consumer market, rather than intentionally orientate their conduct in a way that put them in the best possible position to generate personal gain.
Discussing the reforms he wishes to instigate following the fixed income, currency and commodity market scandals, Carney said: “Such changes are vital but they cannot anticipate every contingency or discipline every miscreant.
“The scandals highlight a malaise in corners of finance that must be remedied. Many banks have rightly developed codes of ethics or business principles, but have all their traders absorbed their meaning?
“Consideration should be given to developing principles of fair markets, codes of conduct for specific markets, and even regulatory obligations within this framework. There should be clear consequences including professional ostracism for failing to meet these standards.”
Mr Carney also identified that G20 leaders and regulators from the Financial Stability Board are currently working collaboratively in order to address the problem of financial institutions that are ìtoo big to failî, an issue which shafted taxpayers out of millions when the financial crisis gripped the world six years ago.
“This is the year to complete that job,” he said. “Perhaps the most severe blow to public trust was the revelation that there were scores of too-big-fail institutions operating at the heart of finance. Bankers made enormous sums in the run-up to the crisis and were often well compensated after it hit. In turn, taxpayers picked up the tab for their failures.”
The governor also argued that extremely loose monetary policies in the country had succeeded in stopping a whole generation of individuals being unemployed for long periods of time and had enhanced peoples social mobility capacities and pledged to use the new powers given to the Bank of England by the Chancellor George Osborne to minimise the risk of an equivalent crash occurring in the future.
He pointed out that one of the most important things he had taken from the recession was that compensation schemes which gave individuals attractive bonuses for short-term returns are dangerous as they essentially push people to amass a large level of debt at a high level of risk.
“In short, the present was overvalued and the future heavily discounted.”
Carneyís decision to launch a critique of the banking sector is representative of the job he has done so far as governor of the Bank of England; honest and responsible.
It is refreshing to see a representative of the banking industry illustrate such honesty and commitment to upholding the social contract and Carney is right in pointing out that financial institutions should be obligated to uphold ethical standards and function for the benefit of society because in a capitalist world, money reigns supreme and these are the organisations tasked with being the regulators and arbiters of this particular political system.
He is also correct in his implicit remarks that society will not stand for another taxpayer funded bailout and his comments might serve as a veiled warning to banking officials of the potential consequences they face if their misconduct culminates in a fresh global economic downturn.
Whether his words will have any effect on some of the more self-interested and corrupt banking elite is highly contentious, but it does clearly illustrate that there are officials at the top of the financial sector which are keen to see change and reform in the banking sector. Whilst this may not be enough to stop inequality, poverty and poor social mobility being incurred in the future as a result of banking staff failing to adhere to ethical standards, it is nevertheless a step in the right direction and will fuel hopes of many people who I am sure wish to see the day that the big banking sector functions for the benefit of the consumer again, rather than merely for personal and shareholder gain.