Apr 16 2012

The Euro zone crisis: new CRESC paper

Posted by: Nick Shaxson in: Thoughts

Manchester University’s Center for Research on Socio-Cultural Change (CRESC) which has written some of the best analyses of the UK financial sector and its impacts, has issued a useful new Working Paper entitled Deep Stall? The euro zone crisis, banking reform and politics.

I have only read part of it so far, and as with previous CRESC publications it is written in too much of an academic style for my particular tastes, but it is clearly making important arguments. Two big points.

First, it argues that the crisis is not only or mainly about sovereign debt or trade imbalances, but it is also as much a banking crisis arising from issues such as rehypothecation and interconnected bank balance sheets which, in the event of a major disruption, produced an unmanageable financial crisis. Second, it restates their earlier argument about how the inability to reform finance is rooted in the decline of political mobilisation and participation. (Karel Williams, a co-author of the paper, had an article in last Thursday’s Guardian briefly summarising the first argument.)

Among many other things, the paper argues that

The response of European political elites (and media commentators who identify with them) in 2011 was a chorus of demands for incisive leadership which connected high politics with romantic business school or military academy views about how charismatic CEOs and generals can master otherwise intractable events by force of leadership. This, we suggest, looks like nonsense.

The paper makes ten robust proposals for change, some of which pull no punches. Such as these ones:

  • The Basel Accord should be scrapped. Basel is finance theory alchemised, statistically suspect and business model ignorant…
  • Cross-border interconnectedness of bank balance sheets should be severely reduced by setting limits on national banking systems’ cross-border credit exposures and cross-border credit dependence as a percentage of national GDP
  • Banks should be split nationally and EU-wide into utility and investment banks. We should go beyond the British Vickers recommendations for ring fencing.
  • Investment banks should not be allowed to do proprietary trading (by rules more fierce than envisaged in Dodd Frank) and their role should be to facilitate funding and investments in specific industries and regions of which they have specialist knowledge.
  • All derivatives should be licenced on a case-by-case basis, all synthetic derivatives should be banned in principle, and new European-wide limits on rehypothecation should be introduced.
  • The highest pay in banking should be capped at €500,000 and annual bonuses should be abolished

As long-term goals, I think that these are excellent ideas. Politically extremely difficult, all of them, but if you  make calls and recommendations only based on what is currently politically feasible, you will have tied your hands before we even start. There are also six proposals for avoiding the capture of knowledge by special interests and expanding debate about what is in the collective interest. An essential idea. I would have to think more about the specific proposals, but some if not all of them look well worthy of attention.

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