Barclays’ profits, Glass-Steagall and the casino
Eating my porridge this morning listening to the Today programme talking about Barclays record profits, and the old Glass-Steagal idea. Separate the utility from the casino, by separating the clearers from the investment banks.
This is what the US did after 1929, a process that lasted until the Reagan de-regulation. In Britain, our City merchant banks – those almost forgotten names like Kleinwort Benson and S.G. Warburg also kept well away from lending money to you and me or handling our cheques, until everyone was caught up in the same rush to deregulate. Hindsight is a wonderful thing, and by the 1980s the depression-era rules had become obsolete. We needed regulation for the digital age, but the free-market fundamentalists persuaded us that we needed no regulation. Essentially, they made it up as they went along, patching up the regulations with rules as one disaster – Enron, Long Term Capital Management, Worldcom – followed another. It became politicised; in the UK, our Financial Services Authority will be abolished by the Tories when (if?) they get into power.
The problem is that investment banking, the casino half of the business, is a really important utility. Its job is to raise risk capital for business. The risk is where the casino bit starts to come in. Now, if the system were working properly, Barclays would be making lots of profits because it had invested in lots of profitable businesses. But it hasn’t. Like all its peers, it’s been playing the casino as markets recover from the pit they were in at the end of 2008. Not surprisingly, it’s made money. All the investment banks have – it’s easy to make money in a bull market; but businesses that need risk capital to invest in new processes and create new jobs to pull the whole economy out of recession aren’t getting it. This is because it’s more profitable for the investment banks to buy under-priced shares in existing businesses.
Let’s look a little bit more at why this is the case. First, it’s easy to measure profits made this way. So it’s easy to have a bonus structure that favours short-term profits. Raising risk capital for new businesses is much slower, more painstaking work. The lead-time is much longer, so bonuses are hard to calculate. Everything in the structure of the market and of the banks’ internal control systems favours the short-term, easy profits of market trading, and not the long-term, difficult profits of backing business.
This is nothing new. It’s always been the nature of the capital markets, and complaints about it are almost as old. The capital markets should be about channelling private savings into enterprise, and it’s a function that the economy needs. But the capital markets are really, really bad at it because there’s more money to be made in speculative trading in the markets. What you find is that a surprisingly small proportion of the economy raises money from the capital markets. Informal arrangements within families and communities back many of the most innovative enterprises.