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Too big to regulate

Two years after the global financial system imploded, the world’s central banks and regulators have agreed a set of measures intended to prevent a repeat performance. There are, however, more than just a few flies in the ointment.

The measures agreed are really quite simple. They require banks to double to 4.5% the ratio of capital held in reserve to meet losses of “risk-weighted assets”. Banks that fail to meet the basic provisions will not be allowed to pay dividends.

The accord reached in Basel is supposed to “ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth.”

In response to fears that the impact of introducing the tighter controls could themselves trigger new crises, the new limits will be phased in over a period up to 2019, much to the relief of the speculators on the global markets which marked bank shares up on the news.

In its simplest terms, the assumption underlying the new regulations is that they will stabilise the financial sector. This would allow enough time for the global capitalist economy to recover its growth trajectory.

There are, however, more than just a few flaws in the accord, and the most obvious is admitted by the official press release, which says: “Systemically important banks should have loss absorbing capacity beyond the standards announced today.”

Put another way, the influence of some very large banks has become so great that it puts them beyond the powers of regulation. According to the Forbes 500 list, the top eight corporations in the world measured by their assets are all banks: BNP Paribas, HSBC, Bank of America, JP Morgan Chase, Banco Santander, ICBC, Wells Fargo and the China Construction Bank.

Their towering “assets” are, in fact, accumulated debt and it’s a burden that is taking its toll around the world in terms of job losses, cuts to pensions, destruction of public services and lower living standards.

The creation of these behemoths was a necessary consequence of keeping capitalist growth on track during the globalisation decades. Then, the volume of credit and the velocity of its flow around the spreading networks grew much faster than the production of commodities. Regulation was relaxed and then eliminated; new forms of credit were created that circumvented whatever controls remained; and financial markets beyond the reach of regulation are continuing to expand.

Towards the end it seemed – to many – as though the world of credit had taken to the air on a hugely profitable life of its own separated from the hard reality of the world below. The crash of 2008 proved them wrong. Now the majority are paying the price as the surplus capacity which resulted from an orgy of debt-financed investment and consumption is swept away.

Alongside the restoration of credit controls, indebted governments are hard at work ensuring that anything that hasn’t already been turned over to the for-profit sector will be. In Britain, the Lib-Tory coalition is restructuring the state to abandon responsibility for key services like health and education while cutting benefits to the bone.

Many of those still in work are already discovering the impact of sharpening global competition. For the generation now leaving college, the only hope is for a period of unpaid internship, or work experience to add to the CV. In China, before even completing their studies, hundreds of thousands of college students are being redirected to work for nothing in shiny new factories.

Protests, strikes, resistance or mass campaigns of civil disobedience, can all play a role in highlighting the need to go beyond the existing economic, social and political system. But new, permanent democratic forums must be developed to challenge and replace the existing state. In this way, we can create the conditions for ending once and for all the self-destructive capitalist financial and economic system.

Gerry Gold
Economics editor
15 September 2010

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