For years, Trump lambasted Fed Chair Jerome Powell as a “numbskull” and a “stubborn mule” for refusing to slash interest rates on command. But now the rhetoric has turned to action, with Trump firing the sitting Governor Lisa Cook over claims of mortgage fraud. Enter Miran, an acolyte who has publicly argued for the President’s right to dismiss Fed governors at will, yet who promised in his written testimony to uphold the Fed’s cherished independence.

This dramatic confrontation has sent a familiar shudder through the halls of global finance: central bank independence, they tell us, is under grave threat. The guardians of economic orthodoxy — from central bank governors to mainstream economists and pundits — are ringing alarm bells, warning that political control of monetary policy would be a “very serious danger” to the global economy and would “undermine the very foundations of our democracy”. This has been the mainstream mantra for the past 40 years. The narrative is clear: independent central banks are technocratic bulwarks against the short-term, populist whims of politicians, and their autonomy is synonymous with economic stability and democratic health.

The concept of central bank independence appeared in the wake of the stagflation crisis of the Seventies. According to the Chicago School economists, short-sighted, vote-hungry politicians could not be trusted with the levers of monetary policy: they would be tempted to juice the economy with low rates before an election, risking longer-term inflation for short-term gain. The solution was to hand the keys to the economy to a priesthood of supposedly apolitical and neutral experts — technocrats immune from electoral pressures who could make tough, necessary decisions for the long-term health of the economy.

This idea was institutionalized globally in the Eighties and Nineties. Countries like the UK, Canada, and Sweden granted their central banks statutory independence. The pinnacle of this movement was the creation of the European Central Bank in 1998, designed from the ground up to be fiercely independent with a single-minded focus on price stability. To this day, it remains an unquestionable dogma. As IMF Managing Director Kristalina Georgieva stated earlier this year, “independence is critical to winning the fights against inflation and achieving stable long-term economic growth.” Any threat to it is treated as economic heresy. But this dogma collapses under scrutiny.

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The most compelling rebuttal to the panic is also the simplest: the myth of independence was always just that — a myth. As economist James Galbraith noted, the historical record shows that since its inception the Fed has been a creature of the state. Created by Congress in 1913, its powers are granted, limited and revised through legislation. The Humphrey-Hawkins Act of 1978 also subjected it to regular congressional scrutiny. Congress, in other words, has always held the ultimate authority. It appoints the Fed’s leadership and, crucially, has the legal power to mandate policy changes, a threat it wielded in 1982. Former Fed Chair Ben Bernanke himself once conceded that “the Fed will do whatever Congress tells us to do”. The debate thus shouldn’t be about defending a fiction, but about deciding who the Fed should answer to: the
executive — as Trump would want — the legislature, or, ideally, the public.

Moreover, on a practical and operational level, central banks cannot be fully independent from the treasury. The functions of the two have to be closely coordinated on a daily basis to ensure that the policy targets of each can be met. They are two wings of the same government body, not separate entities. This is the case in most Western countries: a former Reserve Bank of Australia governor, for example, noted in 1994 that legislation in most democracies allows the elected government to override the central bank. Independence, in other words, was always conditional, a carefully managed illusion. The only real exception is the ECB — a point we will return to.

Central bank independence may be an illusion, then, but it is one that has proved extraordinarily useful for elites. It has been one of the most powerful neoliberal tools to depoliticize unpopular economic actions, such as austerity or high interest rates, allowing elected governments to divert responsibility to “external” agencies, such as budgetary offices, or to “independent” central banks, for policies that they themselves supported but feared selling to the public.

In Britain and elsewhere, governments are once again accused of “overspending”, and citizens are told that ballooning deficits and rising bond yields leave no choice but to cut spending or raise taxes — even, in some cases, to consider an IMF bailout. But this yet another myth: while fiscal deficits are often linked to bond issuance — seemingly giving private markets leverage over governments — in reality central banks can (and do) always intervene, purchasing bonds themselves and setting yields at will. The real problem lies in the deliberately opaque accounting structures that conceal this fact, perpetuating the illusion of market discipline where none truly exists.

Small wonder the establishment is freaking out as Trump’s actions risk exposing their cynical ruse. Especially since the era of supposedly independent central banking has been a parade of catastrophic failures. These expert technocrats failed to predict the 2008 financial crash. They then spent a decade failing to revive inflation to their targets. And from 2020 onward, they catastrophically failed to see the coming inflationary surge, responding with the most aggressive rate-hiking cycle in decades while failing to bring down inflation.

This isn’t just because central banks privileged policies that benefited the financial sector at the expense of the real economy. Ultimately, it’s because their power to steer the economy has been exaggerated. In the past, the Fed could influence the economy through commercial banks. Today, shadow banking and global capital markets dwarf its traditional tools — not to mention the fact that the true drivers of inflation, supply and demand, are largely beyond the control of
central banks. Galbraith put it bluntly: “Fifty years ago, the actions of the Federal Reserve mattered. Today, they do not.” Their policies have often simply exacerbated inequality and fueled financial bubbles, proving their technocratic expertise is a shadow of the power ascribed to them.

In any case, even if true independence were possible, it would be profoundly undesirable, since the institution would be truly unaccountable. Just look at the only major central bank designed to be truly independent of democratic institutions: the European Central Bank. Whereas in currency-issuing nations, the central bank is effectively dependent on government or representative institutions, that relationship switches in the euro area, where governments are dependent on their central bank.

In the wake of the financial crisis, the ECB revealed itself as a brutally political actor. In 2011, it forced Silvio Berlusconi to leave office in favor of the unelected Mario Monti, by effectively engineering a fiscal crisis by discontinuing the central bank’s Italian bond purchases. Then, in 2015, it arbitrarily shut down the Greek banking system to force an elected government to accept austerity.

In short, by adopting the euro, European nations did not merely relinquish control over their monetary policy to a supranational authority — an unprecedented move in monetary history — but they ceded it to an authority with a clear, elite-driven socioeconomic agenda. This underscores the reality of a central bank that is truly independent of democratic mechanisms.

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But even currency-issuing governments are not immune. The fate of UK Prime Minister Liz Truss is a stark example. The mainstream narrative is that the “markets” punished her for an irresponsible budget. The reality, as Narayana Kocherlakota, former president of the Minneapolis Fed, noted, is that “markets didn’t oust Truss, the Bank of England did”. Like Trump, Truss’s real sin was challenging the orthodox narrative and questioning the Bank’s remit, not her admittedly questionable economic policies.

One of her first acts was to sack the Treasury’s top official, a symbol of fiscal conservatism and central bank deference. In response, the Bank of England, by deliberately refusing to quickly quell market turbulence, effectively orchestrated her downfall. Truss, of course, bears responsibility for failing to stand up to the central bank — and for not insisting that it accommodate the policy of the elected executive. It was a stark lesson in how the myth of independence empowers unaccountable institutions to veto the platform of an elected government.

The real debate we should be having, then, is not about preserving a myth, but about redesigning the system for genuine democratic accountability. The advent of quantitative easing proved what critics always said: money is created out of thin air. The urgent question is who controls that process, and for what purpose. Optimally, the central bank and treasury should be formally consolidated. There is no technical reason for one part of the state to “lend” to another.

This would end the obfuscation, make macroeconomic policy fully accountable to voters and refocus our efforts on the policies that truly matter: fiscal, industrial and investment strategies. The implications are particularly stark for eurozone countries: the only way to restore genuine democratic accountability is to abandon the single currency and reclaim economic sovereignty. Until we smash the myth of central bank independence, we will remain trapped in a system where economic power is wielded without responsibility — a system that is not only inefficient but corrosive to democracy itself.

It’s probably apocryphal. Lewis writes that he “heard many versions of this vignette”, which was “all over Cambridge in a week, Oxford in two”. But it has a deeper kind of truth: one society’s elite, wearing a grin that might be a grimace, bowing to another’s. Because when the City of London was deregulated in the Eighties, culminating in the “Big Bang” of 27 October 1986, when a whole load of trading restrictions were wiped away at once, Britain’s brightest (or at least, most prestigiously educated) graduates put their noses in the air, and sniffed.

They followed the smell of money to the City, which was soaking up both the investment and the working culture of American firms. In-person trading and a clubby, old-school-tie vibe were replaced with walls of computer screens and punishing office hours. Britain’s elite sloughed off its ambivalence to moneymaking and paternalistic sense of public service, and joined a carnival of pinstripes, braces, champagne and mobile phones as big as bricks.

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Neither of those qualities have grown back. Banks, consultancies and corporate law firms still take a heavy tithe of Oxbridge graduates, even the airy-fairy humanities ones. But we’re not in the Eighties and Nineties anymore, when finance’s power to shape the world eclipsed that of democratic politics. Rather than being high-rolling, cork-popping masters of the universe, the modern banker is a sober, industrious creature. Money is not their liberator; it is something they need in abundance just to keep their head above water in London’s property market. The glamour has died but the drudgery of the day-to-day work remains. As once-solid upper-middle-class professions (teachers, doctors, etc) are being pushed into precarity, finance is in turn becoming a solid, even stolid, upper-middle-class profession. Banking is boring now.

When Donald Trump returned to the White House this year, much was made of a “vibe shift” in American finance back to old-school, red-blooded capitalism and its attendant cultural values. A bull market bellowed, and fig leaves of progressivism were blithely abandoned. JP Morgan swapped DEI (“diversity, equity and inclusion”) for DOI (“diversity, opportunity and inclusion”). Deloitte told staff working on US government contracts to remove their pronouns from their email bios. “I feel liberated,” one “top banker” told the FT. “We can say ‘retard’ and ‘pussy’ without the fear of getting cancelled.”

To be a fly on the wall of that banker’s office during Trump’s tariff shenanigans. Was the freedom to shout slurs across the trading floor worth the biggest stock market fall since Covid? Though the bond market might have disciplined the President into putting a 90-day freeze on most of his tariffs, he still freestyles market-upending proposals in public: a 25% duty on iPhones and 50% on all EU goods, at time of writing, but there’ll be a new batch by the time of your reading. The business world is locked in a perpetual frenzy of second-guessing. These days, “finance is obviously subordinate to politics”, says James*, a finance worker around 30, who I meet in a west London pub one listless Sunday afternoon to get a sense of the modern reality of things.

Our cultural conception of finance is a bit out of date, partly thanks to Industry, the TV series that follows a bunch of young finance guys and gals as they drink, snort, fuck and occasionally trade their way through London. The series’ creators, Mickey Down and Konrad Kay, both worked in finance in the early 2010s and have always maintained that the on-screen hedonism they cook up is generally accurate. But James says that in four years in banking, he has “never, ever heard [of] or seen anyone doing drugs in the office”. Even putting aside the fact you’d get “absolutely fucked up” by HR if you were caught, “no amount of coke can make you feel better” if you’re working 100 hours a week, as young finance foot soldiers typically are.

Which is probably just as well: he says that colleagues around 50, who very much lived by the “work hard, play hard” principle in the first decades of their careers, have noticeably more chronic health conditions (diabetes, high blood pressure, etc) than other professionals their age. Instead, finance’s ultra-competitive ethos has made it the ideal host for infection by the wellness craze. People run half-marathons at the weekend, and wear smart watches that track their health data rather than Rolexes.

This is a world almost entirely alien to the one that Jacob Phillips entered in 2000, aged 21. He hadn’t gone to university, and fell into one of the City’s “parasitic” ancillary industries, media monitoring for financial PR firms. It had a “rough-edged, Thatcherite kind of mindset”, he says. There were no meaningful HR processes. It was difficult to fit in without drinking at lunchtime. On Fridays, “it’d be pretty normal for people to be passing a wrap around and popping into the toilet towards the end of the day”. His bosses “were completely open about the fact that they only wanted to employ young people, because you can push them around”.

Finance is still powered by young people pouring their evenings and nights into numbing, repetitive work, but they are not quite as docile about the arrangement as before. In 2021, junior Goldman Sachs employees launched a high-profile campaign to carve out a sliver of guaranteed free time away from the lair of the vampire squid. James, similarly, says that Gen Z staff are “a lot more open to complain to seniors than we ever were”, which helps keep upper management in check even if it does mean his direct underlings are “very whiny” at times. Sarah*, another banker a few years into her career, sees a distinct culture shift with new Gen Z recruits. “They are very good at their jobs,” she says, “but don’t sign up to the narrative that you need to get in before the boss does and leave after.” This, she thinks, is down to there being “less scope to make lots of money over the next 20 years”. If you can get less out, you’ll put less in — it’s not an equation you need a quant for.

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This is the latest chapter in what’s been a deeply generational story. Along with wider cultural shifts, there’s an underappreciated and very specific factor driving finance’s death of largesse: banks, private equity houses and the rest becoming publicly listed companies. Goldman and BlackRock in 1999; Lazard in 2005; Evercore in 2006; Blackstone in 2007; KKR in 2010; Carlyle in 2012; TPG in 2022; CVC in 2024. These listings made a small group of senior partners fantastically wealthy, but invited in far more scrutiny from shareholders and the wider public. Salaries and bonuses have to be justified to outsiders; tightening expense accounts bounce employees from business-class flights to economy.

Essentially, boomers who had their fun in the buoyant Eighties, Nineties and early 2000s decided to cash out at the expense of their juniors. Where have we heard that one before? It’s a mirror of the generational distribution of wealth in society at large — in fact, the dynamics are even more distorted, thanks to the 2008 financial crisis. Those who started work by about 2000, and so achieved a degree of seniority before the 2008 crash, are rich rich. Anyone younger is merely very wealthy. The guys in their 50s and 60s “come from a very different world”, says James, and the best anecdotes, like buying more than one Ferrari in a single year, are usually theirs. So why wouldn’t their Zoomer juniors quiet quit? The sadomasochistic contract written down the spine of the industry — work like a dog for me, and one day you’ll be as rich as me — is provably false.

Let’s get this in proportion: no one here is on less than six figures, and if you do well, your salary will probably start with a 2 or 3 by the time you’re 30. But the cost of London property, plus the sky-high cost of everything else, leave psychological scars that embed an “upper middle-class mindset where you are very rational with the money”, says James. “I know people who take home over a million pounds a year and absolutely stress over the temperature at which their flat is set up. If I earned a million this year, my lifestyle wouldn’t change at all.” People, in general, aren’t flashy — what’s the finance bro obsession with outdoorsy brands like Patagonia and Arc’teryx if not a performative disavowal of finery and frippery? And there’s always the axe hanging overhead. “Banking workforces are constantly getting squeezed,” says Sarah, “so there’s concern the money train won’t last forever, which holds people back from spending.”

When Phillips was in the City, he says there was a pervading, “subtle sense that markets rule everything”. He left after five years, in 2006, and has since become a writer and academic. But when he first read the accelerationist writer Nick Land, his mind was taken back to his old career. “It really rang true with this sense there that the market was this strange, complicated, sinister, untameable beast which could ravage anything in its way. You either rode the tiger or you’d be destroyed by the tiger.”

Now, “governments matter”, says James. “What we had in the Nineties and 2000s was an anomaly.” In a funny way, we’ve gone full circle. Before the Thatcherite revolution, finance was a stable, comfortable career. In Liar’s Poker, his book about his years at Salomon Brothers, Lewis meets a minor City grandee who tells him he disapproves of workdays longer than eight hours, because “you then arrive at the office in the morning with the same thoughts you left with late the night before”.

Work patterns are now very different, but finance is, once again, an industry where the overriding attraction is stability rather than possibility. You’ve heard the stats, or a variation on them, before: in 2002, the house price to median earnings ratio in London was 6.9; in 2023 it was 11.9. For day pupils, average private school fees as a percentage of the median national salary have increased from 30.6% in 1999 to 48.2% in 2024. If you want an upper-middle-class life, can you afford not to go into banking, or similar industries like corporate law and consulting? This leads to a vicious cycle — prices go up as London becomes more and more globalized and financialized — and a brain drain, as all the pin-sharp Oxbridge STEM graduates are tempted away from the laboratory. If the government can make a meaningful dent in the housing crisis, and build the Oxford-Cambridge Arc to let loose Britain’s life-science capabilities, maybe there’s hope of all this human capital flowing elsewhere. But as many politicians have found, breaking the tight, wrinkly grip of boomer “stakeholders” is no light task.

James, as we reach the dregs of our Morettis, is candid. “If I was born in our parent’s generation, I would have probably not worked in finance. I enjoy being quite comfortable, having a fat savings buffer, but back then, if a London Zone One flat was £300,000, £200,000, I would’ve happily worked in a general corporate job — maybe even marketing [or] journalism. But because we are where we are today, and how uncertain the next 10, 20 years look like, I want to absolutely max out on income.” It’s hard to blame him, or all the other bright young things in their down-padded gilets streaming through the grey dawn into central London every morning.

*Names have been changed

Cast your eyes elsewhere and witness another phenomenon. It is to do with how we decide what to think, and it is founded on the idea that no good can come from someone we deem as bad. This sinner commands scant sympathy, no matter their plight. Whatever they say is right is actually wrong, and whatever they say is wrong is actually right. We can set our compass by them.

Now look in a third place, where we find motives and incentives. Here, one is rewarded for coming to swift and certain judgments, no matter how flimsy the evidence. The prizes are symbols of affection and words of praise and a quantifiable increase in influence.

It may seem laughable to cast the above as context for a dispute between a man and his bank, but various currents in contemporary culture have swept us to this point. If only they would leave us here, we could view the episode as trivial, or mildly vexing or wryly amusing. But these currents are strong, and they will not leave us here, and they may destroy something.

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Much discussion surrounding the matter of Nigel Farage and Coutts has been rather like a curious game of ping-pong, one played without a net or even a table. One says this, one says that, and back and forth it all goes. But one has been able to say pretty much anything, because the known facts have been so scarce. Hit the ball wherever you like and your opponent will return it; it can never be called out.

Farage has at least now provided some documentation to support his claims. Minutes from the bank’s “wealth reputational risk committee” stated it “did not think continuing to bank NF [Nigel Farage] was compatible with Coutts given his publicly-stated views that were at odds with our position as an inclusive organisation.” It added: “This was not a political decision but one centred around inclusivity and purpose.”

Later, faced with the resulting ire, it responded by clarifying: “It is not Coutts’s policy to close customer accounts solely on the basis of legally held political and personal views. Decisions to close an account are not taken lightly and involve a number of factors including commercial viability, reputational considerations, and legal and regulatory requirements.” Complicating the issue is an apparent offer from Coutts for Farage to bank with its parent company NatWest. So Farage’s claims may not have been entirely debunked, but neither has he been entirely debanked.

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Yet there is surely a question over those minutes, and what they mean in a broader sense. Despite everything, it seems our trust in banks has never been greater. We are only a few years on from the Great Crash and resulting bailouts, and yet the way we pay is becoming vastly more dependent upon them. The drift towards a cashless society and an enormous increase in online transactions have left us at their mercy. Stashes of cash, privately held, are of diminishing use. Living without a bank account is becoming impossible.

We may well think it fine for certain companies and institutions to proclaim certain ethical principles; we may even find it admirable, and give them our custom. And we would expect them to conduct business in accordance with these principles: if their actions told a different story, we might then call them hypocrites. But the more essential the service, the more concerning this becomes.

Coutts may not be an essential service, but normal high-street banks are. And it is easy to imagine such a business boasting of being “inclusive” and driven by “purpose”, a term used in boardrooms today meaning, according to one definition, a desire to be a force for “positive change” in society. In denying its services to someone who failed to comply with its “values”, it could justify itself not only commercially, but morally.

This principle extends into a form of investing known as ESG (Environmental, social, and corporate governance), which, like “purpose”, looks beyond the financial: it encourages the direction of money towards enterprises that the investor believes are moral, and away from those the investor believes are immoral. This may be laudable, and is doubtless well-intentioned. And yet.

The problem is that these are ideologies that fail to realise they are ideologies. To many of their proponents, it is just a matter of being kind, doing good, keeping on the right side of history, and making life better for more people. Their virtue is self-evident, so anyone who opposes them is a creature of vice and must be resisted. And thus we find ourselves in a strange place, where the nice people are coercing us into becoming more like them.

I should be happy about this. I am a Guardian-reading, Remain-voting, lockdown-supporting, double-Covid-vax-boosted Anglican who defends the BBC and wore masks more often than was strictly required during the pandemic. But it is hard to ignore the stirrings of a certain polite and cuddly totalitarianism (it would obviously laugh at the word and create mocking memes, rather than reflect upon itself meaningfully). There are other noxious forces in the world, too — not least a kind of nihilism that seems to be emanating from Russia — and these may be equally destructive, but these tend to be easier for us to identify and thus resist. The evil that wears our own clothes is more able to do its work unhindered.

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And here is where it affects us all, because our economy and way of life more generally will struggle to survive if these currents continue on their path. At its best, the free market is democratic: the free market is obviously ideological and flawed in itself, but in principle it treats everyone the same, regardless of their political views. A financial system that favours certain views over others is obviously a threat to this. And who is to say whether those views currently in fashion will be viewed so favourably in years to come? The progressive Left once advocated for eugenics, after all; which of today’s right-on beliefs will be damned by tomorrow?

Farage versus Coutts, then, is a diverting tale that has added to the gaiety of at least some of the nation. Cashlessness, philosophical shallowness and the warping effect of social media have played their part. But this story feels like a staging post on the way to somewhere else. Sometimes, revolutions come in the strangest ways. A bank for the super-rich may have just accelerated the demise of capitalism.

One might think that, amid a global cost-of-living crisis, these bodies would have other, more pressing concerns. But central bankers are never ones to miss an opportunity — and in fractious times like these, uncertainty is the most profitable opportunity in the business.

To understand the sudden rush towards digital currencies, let’s begin with the notion of “digital money”: as flashy as this may sound, it’s nothing new. In fact, fiat currencies are already digital and have been for a long time: in the UK, for example, 95% of all the money in circulation is electronic (the ones and zeroes that make up the money in our bank accounts), and 85% of transactions are made electronically. Online-only banks are also becoming increasingly common. CBDCs are therefore clearly not about making money digital — it already is.

Where a CBDC would change things, however, is that the digital money would be created directly by the central bank, as opposed to commercial banks. Indeed, when people hear the words “money creation” or “money printing” they tend to think of central banks and quantitative easing, but most of the digital money held in our bank accounts is actually created by commercial banks. We tend to assume that banks collect deposits from savers and lend them to borrowers. But that is not how today’s system works. In reality, when a bank makes a new loan, it simply taps some numbers into a computer and “creates” brand new money, which it then deposits into the borrower’s account. The bank’s pre-existing deposits are not even touched; the money is effectively created out of thin air. Instead of deposits leading to loans, it actually works the opposite way: it’s the loans that lead to newly created deposits. In other words, the banks lend money that they don’t own, at a rate of interest.

This creates a number of problems. First and foremost, privately created digital money is always accompanied by debt (since the new money is created in the form of loans). Moreover, it means that to a large degree, private banks — not central banks — control the supply of money in the economy. This gives them the power to create a potentially infinite supply of money, especially through the process of securitisation, fuelling massive credit bubbles (which inevitably go bust). It also hands them control over where this money goes, which is usually to those who are already well-off and can therefore provide the necessary collateral.

There are several reasons, then, why the current system of privatised money creation is problematic, and needs to be radically reformed. But central bank digital currencies will not solve the problem, unless they were associated with a move towards a full-reserve banking system, whereby commercial banks could only lend deposits created by the central bank, thus giving the latter full control of the money supply. This, however, is not currently under discussion. As the Bank of England has made clear: “The digital pound would not fundamentally alter the traditional channels of money creation”.

So what is the point of central bank digital currencies? One of the arguments made by governments and central banks is that they would provide a safe, state-backed digital alternative to private cryptocurrencies, which are highly speculative, extremely volatile and outside the regulatory control of governments. Regardless of what one thinks of cryptos (personally I’m no fan), this explanation makes little sense. People invest in Bitcoin and similar blockchain-based cryptocurrencies precisely because they are decentralised systems beyond the control of governments, and because they hope their value will rise over time. It’s hard to see why those same people would opt for a highly centralised system like CBDCs, which have failed to build on any of the core insights that led to the creation of cryptocurrencies. Most CBDC implementations, for example, will likely not use any sort of distributed ledger technology such as blockchain.

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Other arguments offered in favour of CBDCs — that they will help promote financial inclusion, improve transactions speeds and economic efficiency, bolster confidence in the currency, and even help fight climate change — either make little sense or are little more than empty slogans. Why would the 1.2 million people in the UK who don’t have a bank account be inclined to open a “digital wallet”? Why would the latter be less energy-intensive than ordinary bank accounts? And if governments want to lower transaction fees and bank charges, why don’t they simply legislate to that end?

Ultimately, it’s unclear exactly what problems CBDCs are supposed to solve or even what their benefits would be. The potential risks of digital currencies, on the other hand, are all too clear. One issue is that of privacy. CBDCs would allow central banks to monitor, record and analyse all transactions in real time, accumulating sensitive payment and user data at an unprecedented scale. As a report published by the IMF notes, “accumulating so much sensitive data in one place increases security risk by making the payoff for would-be intruders much greater, amplifying the scope and scale of many of the security and privacy threats that already exist in today’s financial system”. Such threats could come from cybercriminals or foreign states — but they could also come from government authorities themselves.

CBDCs, after all, would give governments sweeping powers of surveillance and control, allowing them to instantly punish citizens and consumers for behaviours deemed undesirable, by fining them or even locking them out of their accounts at the flick of a switch — in much the same way as China already uses its “social credit” system to prevent people from buying plane and train tickets for so-called “behaviour crimes”.  

This is especially true if we consider that the widespread use of CBDCs could accelerate the transition towards a “cashless society”, a pet project of the World Economic Forum, in which all transactions are monitored and recorded (even though the Bank of England and the Treasury deny that the digital pound would replace cash). Another related issue is that of social manipulation, insofar as CBDCs are “programmable”, meaning that the money can be restricted in the way in which it is used; when, where, by whom — and even whether it can be used at all. This would confer governments a huge degree of control over the spending and consumption habits of citizens — for example to enforce ostensibly “green”, “climate-friendly” and “healthy” choices, or to blacklist certain companies, products and even countries (forget that Russian caviar!).

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Now, it’s important to note such tools could potentially be used for positive ends. Theoretically, they could be subject to democratic accountability and control, and could be used to track criminal syndicates and illicit activities such as money laundering, and to reduce corporate tax evasion, rather than to go after ordinary citizens. But the past few years have made it pretty clear that Western states are heavily swayed by the ruling factions of the capitalist class that make up the biopolitical lobby, the intelligence and security establishments, and globalist organisations such as the WEF — factions that have no qualms about using the repressive powers of the state to cement their rule, and discipline the masses.

In this context, it is perfectly normal for people to be concerned about handing over even more power to governments. The latter, let’s not forget, have already resorted to the kind of techno-authoritarian tactics that critics fear digital currencies will be associated with. Last February, for instance, Canada’s “progressive” government froze several bank accounts connected to truckers protesting the vaccine mandates in the country in order “to pressure protesters to leave the city’s streets”. Similarly, throughout the pandemic, Covid passports were used in several countries to deny millions of people access to a whole range of public spaces and services on the basis of their unvaccinated status.

It’s easy to see why many link the plans for CBDCs to the push towards the normalisation of biometrics-based digital IDs, which aim to make the enjoyment of basic human rights, such as the right to freedom of movement, conditional upon the positive scanning of digital passes. It’s tempting, of course, to dismiss such concerns as the product of over-imaginative minds that have watched one episode too many of Black Mirror — if only such policies hadn’t been implemented already.

When Bitcoin, the first ever cryptocurrency, was launched in 2008, it was hoped its “Blockchain” technology — which records transactions and cannot be hacked — would spark a digital revolution. If a transaction could be carried out securely without the need for an established bank, it would, we were promised, mark the end of corporate capitalism — and the dawn of a new era of decentralisation.

Just over a decade later, however, Blockchain has become the centre of the financial elite’s new-age banking system. Indeed, behind the scenes, they’re going all in on crypto.

Using its very own cryptocurrency, the world’s largest bank JPMorgan has completed its first “interbank crypto trade” with fellow Wall Street titan Goldman Sachs. They carried out the transaction of JPMCoin, JPMorgan’s version of a digital dollar, using its new blockchain system. And with more than a dozen institutions now signed up to it, exchanging more than $1 billion daily, a digital financial revolution is in the making.

Ordinary citizens, however, won’t be part of it. When it was first conceived, crypto’s leading advocates insisted that we had entered a new era of financial autonomy: all you needed to defeat crony capitalism was a Bitcoin wallet and an internet connection.

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But in reality, the crypto rebellion has failed to liberate us, or achieve anything else its founder Satoshi Nakamoto envisioned. Rather than producing a more open, more liberating, more financially free society, the crypto movement has empowered not just another cabal of corrupt financiers, but a hidden cartel of criminals, Wall Street rejects, and what U.S Senator Liz Warren has described as “shadowy super-coders”.

Its prominent members continue to run rampant around the globe, circumventing laws, regulations and ethics to accumulate multi-billion dollar fortunes. Not a single country appears to want to host crypto-billionaire “CZ” and his company Binance, the biggest cryptocurrency exchange platform in the world. Meanwhile, Brock Pierce, the billionaire co-creator of cryptocurrency Tether, is currently using his wealth to engage in “crypto colonialism” in Puerto Rico, where dozens of “entrepreneurs” hope to build a new city that only uses virtual money.

Sensing this rising elite is getting a free pass, the world’s financial power structures have responded with a regulatory hailstorm. And as it has intensified, the more “controversial” outlets have tried to meet regulators’ demands.

Binance has tried to appear more credible by “looking at the potential IPO route” and appealing to regulators, while BlockFi, a cryptocurrency lender that matches all the Securities and Exchange Commission’s criteria for a Ponzi scheme, has had to obey securities laws to continue operating in the US, with five states  —  New Jersey, Alabama, Texas, Vermont and Kentucky  —  striking the fintech company with either cease and desists (requests to stop alleged illegal activity) or show-cause notices (proof that they are not a scam).

As for the bosses of ill-famed Tether, they recently appeared on CNBC, trying to convince everyone that their currency has a one-to-one backing — for each Tether in circulation, they claim to have $1 in their reserves backing it up (though still won’t perform an audit of their reserves).

Since the US Government has come down hard on any entity not playing ball, some of the crypto elite have started to question whether true decentralisation is a delusion. Indeed, they are starting to realise that it is a lot easier to build a fortune  —  and keep it  —  when they participate in the “official” system and follow the rules.

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It’s the same realisation Peter Thiel had in 1999. Back then, his original vision for PayPal was to create a truly anonymous money-transfer system, free from state influence and control. “It will be nearly impossible for corrupt governments to steal wealth from their people through their old means,” he declared, before quickly backtracking and rising through the ranks of Silicon Valley.

Fast forward to today, and the crypto elite have mimicked Thiel’s change of direction. Rather than simply throwing in the towel and admitting the game is up, they have abandoned their cyber-libertarian roots and merged with their enemy: the financial behemoths of Wall Street, the Federal Reserve and Silicon Valley.

It’s easy to see why this would seem appealing; a number of crypto elites are already reaping the rewards of cosying up to the establishment. Jeremy Allaire’s Circle — the company behind the huge, unaudited cryptocurrency USDC — has partnered with Silicon Valley payment giants, Mastercard and Visa. Meanwhile, Brian Armstrong, the CEO of cryptocurrency exchange Coinbase, revealed in a tweet in May that he’d held meetings in D.C with high-ranking state officials, including Congresswoman Nancy Pelosi and Federal Reserve Chair Jay Powell.

All of which raises a peculiar question: Why is the Federal Reserve’s head honcho, Bitcoin’s supposed arch-enemy, collaborating in undisclosed meetings with the CEO of crypto’s main cashier? In Bitcoin Gospel, that’s heresy.

The answer lies in what I suspect are the crypto elite’s real intentions: namely, that they were never really in it for the freedoms Bitcoin could offer, but more for the untold riches it promised. Now they’ve succeeded, it’s all about wealth preservation, and in the age of bailout capitalism, becoming “too big to fail” is the ultimate protection. That is why getting in the good books of Wall Street and the Federal Reserve seems to be the top priority for crypto billionaires. If a crisis emerges, and they threaten to bring down the existing power structure’s financial order, guess what? They’re first in line for a taxpayer-funded bailout.

Right now, it seems inconceivable that the financial elites would bail out the crypto market. But as the bubble gets bigger and becomes tied to Wall Street through its investments, the likelihood increases.

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Take Tether, for example. On top of its $63 billion market cap, half of its reserves are now backed by real-world debt securities issued by Wall Street companies. Given it is a modern wildcat bank, one that issues its own currency, and has failed to provide any proof its assets exist, it is unlikely we will ever know how much debt Tether owns. But if it’s revealed that Tether’s value is, in fact, a swindle, Wall Street could eventually face losses amounting to more than a slight haircut.

In which case, don’t be surprised when the Federal Reserve comes to its rescue. It’s easy to forget that Wall Street can’t be distinguished from the Federal Reserve; the financial elites know that if something goes wrong, Jerome Powell, chair of the Federal Reserve, will be there to step in and bail them out at whatever cost.

And if the next crypto crash does threaten to bring down their system, if wildcat banks like Tether become too big to fail, our current financial power structures will do everything they can to ensure that the status quo is maintained. Two classes of elites will become one, with the “less desirable” parts of the crypto world  —  and likely the taxpayer’s purse  —  becoming collateral damage.

What happens next is anyone’s guess. But with the likes of Goldman Sachs combining forces with such unsavoury characters in the crypto elite, it is not impossible to imagine them wreaking havoc around the globe: charging clients obscene crypto fees and betting against their own Bitcoin products to make even more money. The rest of us, meanwhile, will watch on from afar, knowing that we’re powerless to stop or escape yet another era of financial repression.

If you didn’t know, you probably wouldn’t guess that the £ is a stylised letter ‘L’. At first glance that doesn’t make much sense, but it’s derived from the Latin libra pondo, which means ‘a pound by weight’. Strictly speaking, the first of those two words refers to the unit of measurement and the second to the act of weighing something (it’s the root of the verb ‘to ponder’). However, it was pondo, not libra, that was adopted by speakers of Germanic languages as the unit, eventually becoming ‘pound’ in English.

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Languages derived from Latin stuck with variations of ‘libra’, hence the French word Livre and the Italian Lira. Even in medieval and early modern England, it was natural for educated people (who knew Latin and French) to use an ‘L’ as a Pound sign. The libra connection also explains why the abbreviation for ‘pound’, as in a unit of weight, is ‘lb’.

*

There’s now a 21st-century twist to this tale. Last week came the news that Facebook is launching an electronic currency – called ‘Libra’.

Like the Pound (£), the Dollar ($), the Euro (€) and the Yen (¥), the Libra will have its own symbol – an obscure character called the triple tilde, which looks like this: ≋

Unless you’re a mathematician studying the geometrical concept of congruence, it’s unlikely that you’ve ever seen a ‘≋’ before. However, if the Facebook project succeeds it might not be long before you see it everywhere. Though it may flop or stay stuck in some niche application, there’s a chance that Libra could become a global currency – and, perhaps, the universal means of exchange.

But why would anyone want to convert their £ or $ into ≋?

Libra is a blockchain-based cryptocurrency, and if ‘crypto’ is your thing there are various options to choose from. A few of these have become pretty significant – most (in)famously, Bitcoin. However, they also have limitations as a mass medium of exchange – including obscurity (not enough people have even heard of them, let alone accept them as payment), complexity (just too difficult to use), insecurity (vulnerability to hacking and other criminal activity) and volatility (wild swings in value compared to conventional currencies).

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Can Libra overcome the limitations? Well, for a start, it has Facebook behind it – plus Facebook’s partners in this venture, which include Uber, Vodafone, PayPal and Visa. If anyone can create and promote a digital currency that is widely used, user-friendly and secure, it’s this lot. But what about the volatility problem? What’s to stop privately controlled, electronically-issued scrip from crashing in value?

An extremely useful TechCrunch briefing by Josh Constine explains how Libra would anchor itself:

“The idea is that you’ll cash in some money and keep a balance of Libra that you can spend at accepting merchants and online services…

“Each time someone cashes in a dollar or their respective local currency, that money goes into the Libra Reserve and an equivalent value of Libra is minted and doled out to that person. If someone cashes out from the Libra Association, the Libra they give back are destroyed/burned and they receive the equivalent value in their local currency back. That means there’s always 100% of the value of the Libra in circulation, collateralized with real-world assets in the Libra Reserve.”

Assuming that all works, the next question is: why use it as opposed to all the other online payment systems out there? The big promise with Libra is that transaction fees will be much lower than for, say, credit cards. This would cut costs for vendors – and reduce the friction of online commerce. Constine points out that Facebook already has a relationship with 7 million advertisers and 90 million small businesses. The other participants in the venture can contribute millions more relationships. If transaction costs (in hassle as well as money) really are significantly lower than established systems, then that’s a potentially enormous number of vendors who’d not only accept but encourage payments in Libra.

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Then there’s the billions of people in the world who have limited or no access to financial services. The involvement of nonprofit organisations dedicated to financial inclusion (such as Women’s World Banking and Kiva) points to a global and humanitarian level of ambition. An especially interesting market is made up of the world’s 100 million+ migrant workers – who in 2018 sent $689 billion back home (including $529 billion to low and middle income countries). Transaction costs on these remittances are notoriously high and reducing them substantially would make a huge difference to the recipient countries. It would also spread Libra’s reach across the planet.

So, yes, Libra has the potential to become a global currency used by rich and poor alike. A pre-emptive backlash is already underway. The currency has acquired some unfortunate nicknames such as ‘Facebook crypto’ and ‘ZuckCoin’ – attesting to fears that the Silicon Valley behemoth and its CEO, Mark Zuckerberg, are already too powerful. Do we really want to give it – and him – control of the world’s money supply, too?

But, hang on, Libra hasn’t even been launched yet. Even if it realises its wildest ambitions, it seems unlikely that the custodians of the world’s official currencies – in particular, the government of the United States of America – would tolerate a genuine challenge to its monetary power.

Another source of partial reassurance is Libra’s ownership and governance structure. Josh Constine explains that “Facebook won’t fully control” the system:

“…but instead get just a single vote in its governance like other founding members of the Libra Association, including Visa, Uber and Andreessen Horowitz, which have invested at least $10 million each into the project’s operations.”

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Furthermore, efforts are being made to address concerns over privacy and control of user data:

“Facebook is launching a subsidiary company also called Calibra that handles its crypto dealings and protects users’ privacy by never mingling your Libra payments with your Facebook data so it can’t be used for ad targeting. Your real identity won’t be tied to your publicly visible transactions.”

Even better, the underlying software is open source. So, conspiracy theories aside, this really doesn’t look like an attempt to establish top-control over the global economy.

*

So, nothing to worry about, then. In fact, something to look forward to – a super-efficient payments system minus the rip-off merchants. But before we see Zuckerberg as a Christ-like figure, over-turning the money-changers’ tables, here are three little things that might just cause concern:

Firstly, Facebook doesn’t need exclusive control over Libra to become enormously more powerful. Consider the World Wide Web, which established a user-friendly and seamless means of exchanging information. The Web is governed on a model that is even more ‘open’ than Libra, yet that didn’t stop the tech giants (including Facebook) from establishing a dominant position.

Libra, if it succeeds, would establish a user-friendly and seamless means of financial exchange. The world apart that is Chinese internet provides a model of what happens when the distinction between the tech and finance industries is erased. For instance, the Chinese mobile payments market is fifty times bigger than in America and WeChat (the closest equivalent to Facebook) has a commanding position as the “app for everything.” Libra could create similar conditions in the west and Facebook would be ideally positioned to take advantage.

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Secondly, the fact that Libra itself is designed to keep information about individual payments secure, anonymous and decentralised is not necessarily good news. One way of getting the notoriously undertaxed tech sector to pay its fair share is to use levies to target it’s revenues at source – e.g. as generated by advertising clicks or online sales. That could prove more effective than trying to apply corporation tax to the industry’s well-massaged and footloose profits. All the time that the tech giants know exactly where each dribble of revenue comes from, the law can be used to verify the taxes that ought to be paid on it.

That however could be rendered impossible by a completely anonymised and opaque transactional system. Expect tech-savvy governments to pay very close attention to how the technology evolves – privacy must not become the enemy of transparency.

Thirdly, what if those controlling Libra decided to behave really, really badly – i.e. like the monetary authority of a sovereign state? The early indications are that the system is intended to operate within very strict limits. As described above, Libra will only be issued in exchange for an equivalent amount in a hard currency like US Dollars. This is to create confidence in Libra as a reliable store of value, without which it is unlikely to achieve widespread acceptance.

But imagine a future in which Libra or some rival system is well on the way to becoming a de facto global currency. The closer it gets to achieving the status of a universal means of exchange, the more it will become its own guarantee of value – valuable not because it is exchangeable for other, more conventional currencies, but because enough people need and want Libra. At that point, its controllers will be tempted (or may even be pressured) to turn on the metaphorical printing presses and issue Libra backed up by nothing except public faith in the system.

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One method might be to set up a Libra bank that creates currency out of thin air, lends it out and then destroys the money when it is repaid (but pockets the interest paid by the borrower). That might seem completely bizarre, but this is how conventional fiat currencies and conventional banks already work – in the modern world, that’s where money comes from.

*

To be clear, there’s zero evidence that this is the Libra masterplan. The objective is to create a cheap, easy and reliable way of buying and selling, giving and receiving, just about anywhere in the world – a bridge between countries and their currencies, not a rival source of monetary power. The irony is that the more Libra succeeds in its stated objectives, the more it will be seen as a potential threat to the established order.

The thought was this: the amount of money denominated in any particular currency isn’t fixed – in almost all cases it increases over time. It must do, otherwise economies wouldn’t be able to grow (at least not in units of the aforementioned currency). The question, therefore, is where does the extra money come from?

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By Nomi Prins

Luckily, the place I was working at the time contained a number of people whose job was to know about the economy and economic policy. Some of them would go on to related careers in government, journalism and finance. Surely they could tell me where money comes from.

But here’s the thing, none of them could. It’s not that they were stupid. They knew the facts and could crunch the numbers required to get their degrees and do their jobs, but clearly that knowledge didn’t include an answer to my question.

Of course, even I knew where physical money, i.e. cash, comes from. The notes are printed and the coins minted by the state. However, in a modern economy, cash is the loose change of the money supply – most of which only exists electronically in the form of bank deposits and the like.

So where does that sort of money come from? None of the people I asked knew. It’s strange because while we talk endlessly about how money is earned, spent, taxed and redistributed, how it comes into being barely gets a mention.

It is, however, the topic of an eye-opening article by Pierre Ortlieb for the Economic Questions website.

Ortlieb tells us the truth, which is that most money is created by banks in the process of making loans. I mean that quite literally – the money that a bank lends to a borrower is simply brought into being at the stroke of a pen (or the click of a keyboard). Yes, really – they are allowed to do this. It’s all perfectly legal. In fact, it’s fundamentally what banks are for.

When the loan is repaid, there’s another click of the keyboard and the money is destroyed, returning to the notional space from whence it came. (However, the interest paid on the loan is not destroyed and is instead trousered by the bank – a little thank you for their trouble.)

There are complications of course, but basically that’s where money comes from.

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Ortlieb is not revealing some deep dark secret here – prominent financial institutions have made it quite clear how it all works:

“For instance, in 2014, the Bank of England published a short, plainly-written paper that described in detail how commercial banks create money essentially out of nothing, by issuing loans to their customers. The Bank author’s noted that ‘the reality of how money is created today differs from the description found in some economics textbooks,’ and sought to correct what they perceived as a popular misinterpretation of the credit creation process…”

A lot of people, however, still believe in the ‘textbook explanation’ i.e. that banks expand the money supply by lending out their savers’ deposits. As the Bank of England explains, the mere act of saving money doesn’t create anymore of it – because if it wasn’t being saved it would be spent. In fact, spending the stuff may well be more of a stimulus to the economy than sticking it in a savings account.

The idea that commercial banks are creating money out of thin air is counterintuitive, indeed downright disturbing. We assume that only the state can ‘print money’ and we hope that the printing press stays in the hands of sober and sensible central bankers. But no, it turns out that commercial bankers have money creating powers too!

That said, the central bank sets interest rates, putting a limit on what people can sensibly borrow and therefore what the commercial banks can sensibly lend. This constrains their money creating powers.

With interest rates currently so low, central banks have been resorting to the alternative mechanism of quantitative easing to jumpstart the economy. Ortlieb argues that the weirdness of QE has prompted the authorities to be much more open about how money works:

“As quantitative easing has stoked public fears of price instability, monetary authorities including the Bank of England have sought to clarify who really produces money. In this sense, taking steps to inform the public on the real source of money – bank loans – is a worthwhile step, as it provides constraints on what a central bank can be reasonably expected to do, and reduces informational asymmetries between technical experts and lay citizens.”

Perhaps the best way to assuage concerns that QE is ‘funny money’ is to be clear that it’s all funny money. QE or no QE, the modern economy runs on a medium of exchange that is created out of nothing and is only worth something because everyone believes that it is.

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This is the nature of a fiat currency, and in these troubled times Ortlieb urges those in charge not to hide the truth:

“Central banks would be better off engaging in a clear, concise, and careful communications program to inform the public of how credit actually works, even if they might not really want to know how the sausage gets made.”

I’m sure that’s right, but all the same, it’s probably best that people aren’t thinking too hard about what’s in the sausage when they’re eating it.

Even as it has surfed commodity price waves for the raw ingredients it exports to the world – most notably the iron ore that has put steel in China’s explosive expansion – Australia has remained a safe, if not particularly dynamic, economy.

Much of the that success is put down to the stability and power of its ‘Big Four’ banks: in order of size, the Commonwealth Bank, Westpac, ANZ and NAB.

As a share of gross domestic product (GDP) Australia’s banks are the most profitable in the world. Their share is 2.9% of everything the nation produces: only China (2.8%) and Sweden (2.6%) come close. The share in the US is 1.2%, and in the UK it’s 0.9%. Figures from ‘The Banker’ put it just as starkly. Even though Australia is the 13th largest economy in the world, with a population of just 25-million people, its banks rank 6th for pre-tax profit.

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These figures should add up to sunny days for bankers. But the release of the final report from a year-long inquisition into the culture and practices of the banks has capped a sorry saga of greed, flagrant law-breaking and contempt for customers.

Propelled by a series of scandals at Australia’s largest bank, the conservative Government was forced by its own backbenchers and Coalition partners to cave to Opposition demands for an inquiry. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, launched in December 2017, was given a tight timeline, but extraordinary powers to compel witnesses, extract documents and find answers.

After more than 50-previous probes in recent years, few expected findings that would ruffle the stability of the cosy system.

But retired High Court judge Kenneth Hayne was canny, using jaw-dropping personal stories to illustrate a systemic sickness in Australian banking.

English roofer David Harris developed a gambling problem, and started betting with funds on the first credit card he’d ever been given. When he reached this $10,000 limit, second and third cards came. Offered a credit limit increase to $32,000, he told the bank about his problem and begged them to stop. The bank continued to present him with offers of more credit.

At least he was alive to deal with his problem. Not even death could stop the Commonwealth Bank taking fees from customers – charges it wasn’t entitled to even if they’d been alive. Deceased customers were charged fees for personal adviser services, in one case for more than a decade. The bank received complaints for four years, then sat on internal and external reports about the practice for two more years, before finally informing the regulator of its wrong-doing.

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The public already had a dim view of the banks’ rapaciousness; the scandal plumbed their reputation further. It was a morbid angle on a broader ‘fees for no service’ scandal that, exposed in 2016 as a A$178 million problem, has now been revealed to have led to customers being wrongly charged A$1 billion.

The problem wasn’t ‘bad apples’ – or “pockets of poor culture” as the Commonwealth Bank’s initial submission said. The issue was systemic across the big banks – all of which had excellent systems to check the fees were being taken for ‘services’, but little concern for checking if any service was actually provided.

These stories – like the recording of a call-centre worker badgering a man with Down Syndrome to purchase worthless insurance – have aired almost on a loop on TV news programmes and websites, as the Commission has moved around the country taking evidence.

I’ve followed the Royal Commission’s hearings for a year. The shock hasn’t been just in the traumatic stories from aggrieved customers, but from the chillingly calm emails, meeting notes and evidence from bank executives discussing how to deal with behaviour that takes money from customers to enrich themselves.

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Take AMP. A financial firm with interests in wealth management, mortgages, pensions and insurance that has been in business since 1848. People are now discussing how long it can survive.

One day’s worth of disarmingly-honest testimony from a senior executive revealed how the company ripped off its own customers by charging them service fees but provided nothing in return. AMP repeatedly misled regulators about the company’s deliberate business decisions to keep the ill-gotten funds and maintain the corrupt practices from which they profited. Most notably, the chair intervened in a supposedly ‘independent’ report on the scandal being sent by the company’s law firm to the regulator in order to remove the name of the CEO from a list of staff interviewed, and insert a paragraph clearing him of any knowledge of it.

The revelations of meddling and dishonesty exploded. Suddenly the Government, which had resisted the inquiry throughout, was now proposing legislation to increase fine and jail terms for criminal executives. The CEO’s planned resignation became immediate. The chair and almost half the board resigned. The annual general meeting ended in a shareholder revolt.

But the culture of the company they’d presided over was infected. An internal AMP report said letting customers know they were paying fees for no service could lead to calls for compensation. Taking the money was okay, but informing them “would be a very negative customer experience”. Even after they’d been forced to pay bank customers, they couldn’t stop forcing their staff to lie. A call centre script showed workers were told to tell customers, if they asked about the refunded fees, it was an “administrative error”.

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The regulators got a hiding from the Commission as well. Their timidity was key to lax standards, and to companies walking down paths they knew were legally fraught.

Australia’s competition regulator escaped largely unscathed. But the conduct watchdog, the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) that focuses on the overall stability of the financial system, were savaged over their weak enforcement, paltry fines and preference for negotiating settlements rather than prosecuting them in public view.

Both have vowed to ‘muscle up’, with ASIC’s chair James Shipton noting its starting point with enforcement is now: “Why not litigate?”.

That will mean changing the habits of a lifetime. ASIC and APRA – who’ve barely seen the inside of a court-room in a decade – have just received referrals for civil and criminal prosecution for 24 institutions, and unnamed individuals, exposed at the Royal Commission.

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The Commissioner’s report was brutally simple: “Why did it happen? Too often, the answer seems to be greed”.

Selling became the focus of institutions attention. From the top floor to the shop floor, everyone was being measured and incentivised to sell without considering how appropriate or useful a product was to the person paying for it. The Commission’s recommendations are focused on ending that: it’s good news for customers; bitter medicine for the banks.

Commissions will effectively be killed off in financial services. Mortgage brokers – who arrange more than half the home loans in Australia – will be forced to accept a ‘best interests’ obligation: they’ll have to do the right thing for the customer, all the time. Car dealers will be subject to the same responsible lending laws as all other credit providers, killing off a ‘point of sale’ loophole that trapped thousands in bad loans. And financial planners will have to contact clients annually and get their on-going agreement about the fees they charge.

Institutions and as yet un-named individuals have been referred to regulators to prepare a case for criminal charges. While the regulators have a limp record of taking matters to court, even a few prosecutions will have an immediate and chilling effect on borderline conduct at big institutions. And such long overdue action might just help rebuild faith in our financial sector.

The final report prescribes a cure for the heart of Australian banking. But the year-long probe did as much good in just diagnosing the sickness. De-regulation, super-charged by weak enforcement of admitted misconduct, fed an atmosphere of bullet-proof risk taking. The system wasn’t broken. For the banks it was working perfectly.

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In an excellent briefing for MIT Technology Review, Martin Chorzempa explains why the Chinese are so far ahead of the West when it comes to ‘fintech’ (i.e. financial technology).

Basically, it’s all about the apps:

“Ant Financial’s Alipay and Tencent’s WeChat have changed the way many people live their financial lives. They are one-stop shops that enable half a billion Chinese to access a dizzying array of services, from payments, loans, investments, and credit scores to taxi rides, travel bookings, and social media.”

Online financial services obviously exist in the West, but there’s nothing to match the scale or scope of the main Chinese apps – and the services thereby enabled:

“Because so much is sold via these apps, Alibaba and Tencent know the health (or lack thereof) of many small businesses across China. As a result, they can lend to companies that banks might consider too risky. Likewise, people with no traditional credit score can get cheap loans because Ant Financial has their payment and purchase history.”

Of course, that raises the question as to why these apps have become so important and powerful compared to their western equivalents. Chorzempa makes it clear that it’s not because China has developed cutting-edge technology not yet available in the West. The key fintech systems were developed elsewhere, it’s just that the Chinese have run further and faster with what’s available than we have. Furthermore, they’ve done it in an astonishingly brief period of time; Chorzempa reminds us that just 15 years ago only 7.3% of Chinese people used the internet compared to 65% of Americans.

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But perhaps what really needs an explanation is not the speed of China’s fintech advance, but the lack of progress in America and other western nations.

Tech giants such as Google, Amazon and Facebook have built up their empires by dominating a particular field of online service provision – such as search, online retail and social media. But missing from that list of digitised and disrupted sectors is finance.

In the West, the online provision of personal financial services is more an extension of the ‘traditional’ industry than a disruption of it. Unlike, say, the high street retailers, the high street banks and building societies do not yet face an Amazonian existential threat.

As for the application of fintech by the established industry, that has been evolutionary not revolutionary – enabling rationalisation and centralisation (bye-bye, bank branches; so long, bank managers) as opposed to Chinese-style disruption.

When you consider the ‘value’ that Facebook has extracted from its access to our holiday snaps and social networks, it’s astonishing how little the banks have done with everything they know about our personal finances. Imagine the money that Silicon Valley could make if it controlled such a commercially-potent source of data – or rather, don’t imagine: just look at China.

As so often, it turns out that necessity was the mother of invention.

“In 2004, when Alipay launched as a simple payment option, Chinese finance was extremely low-tech. Clunky state-owned banks had nearly gone bankrupt from bad loans, and they cared little for average consumers. People had to travel to bank branches and wait in long lines to pay their bills; savings were eroded because the government set the interest rate on deposits below inflation; and barely anyone could get a credit card.”

In the West, however, the established banks are good enough, from a customer-point-of-view, not to drive people towards a disruptive online alternative. Unfortunately, from a taxpayer-point-of-view, we had to bail them out. So why should they bother innovating entirely new sides to their business models when they’re already too big to fail?

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By Jonathan Tepper

Perhaps we should be grateful that we haven’t seen the equivalent of an Amazon or a Facebook disrupting the financial sector (or emerge from within it). While the biggest banks may be too big to fail, at least there’s a lot more than one of them. The tech giants, on the other hand, tend towards globalised monopolistic positions in the sectors they operate in.

A near total concentration of market power is unhealthy in any industry, but in finance it could prove fatal.

I’m in favour of restriction. The biggest problem with the British economy – and with Western capitalism in general – is not too little freedom, but too much. Too much, that is, for those who make it their business to increase their share of existing wealth without creating any. This is what economists call rent-seeking (which includes, but isn’t limited to, what tenants pay to their landlords).

Rent-seekers are able to extract value from others because of the monopoly rights that the state gives them over a particular resource – be it land, intellectual property, permission to pollute, political power or something else. Rent-seeking is therefore a result of government policy. Unsurprisingly, governments find themselves relentlessly lobbied by those with a vested interest in maintaining the unjust, opportunity-sapping status quo.

Further reading

What the Tories need in their next leader

By Graeme Archer

Taking on those vested interests requires courage and determination. But that’s why a government – especially one that believes in the opportunity to create rather than extract wealth – should be judged on the quality of its enemies.

Here are ten enemies that the Cameron and May governments should have made, but didn’t:

1. Land owners

Conservatives believe in the right to private property. And so they should. But that right shouldn’t include the uplift in value created when land becomes ripe for development.

The price of farmland can shoot up from less than £10,000 to more than £1,000,000 an acre just because of a planning decision. The act of merely owning the land has contributed precisely nothing to this added value – and yet landowners are able to claim the lion’s share of it.

This injustice, which Winston Churchill condemned back in 1909, lies at the heart of the housing crisis – a crisis which is destroying the Conservative ideal of a property-owning democracy and therefore popular support for conservatism among younger people.

If the Government did something about legal barriers that prevent it from acquiring land at agricultural-use value to build new housing, then a whole range of opportunities could open up. Instead, it continues to side with a few lucky farmers rather than millions of aspiring home owners.

2. The big developers

Of course, if we built more houses, the law of supply and demand would mean lower prices and reduced profits for those lucky landowners, right?

Wrong – and so is the idea that the planning system is mostly to blame for the dearth of new homes. In fact, there’s a huge backlog of unused planning permissions – leading to accusations that the big developers are “land banking”; ie, manipulating the development of the land they hold to control prices.

Of course, that can’t be possibly be true, because the Government has commissioned an investigation – the Letwin Review – which has been taken as evidence that developers don’t land bank. However, the Independent Review of Build Out Rates, Draft Analysis, June 2018, also says this:

“The fundamental driver of build out rates once detailed planning permission is granted for large sites appears to be the ‘absorption rate’ – the rate at which newly constructed homes can be sold into (or are believed by the house builder to be able to be sold successfully into) the local market without materially disturbing the market price.”

Deliberately restricting supply in order to stop prices from falling? How is that not manipulating the market?

It’s plainly obvious what’s going on. The Government must stop hiding behind jargon like “absorption rates” and take land supply out of the developers’ control.

3. Nimbys and cowboys

The planning system isn’t entirely free from blame. A particular problem is the designation of green belts around urban areas. Preventing sprawl is a worthy objective, but choking the growth of prosperous cities such as Oxford and Cambridge is not. Model developments like Poundbury in Dorchester, show that we can build beautifully designed extensions to towns and cities that enhance local life instead of harming it.

However, instead of negotiating a grand bargain on sustainable urban development, the Government has failed to confront the green belt fundamentalists, while turning a blind eye to ugly, piecemeal development in unprotected areas – the worst of both worlds.

4. The bankers

In August 2011, riots erupted across urban England. But what happened next was just as remarkable: a shock-and-awe demonstration of the power of CCTV. Rioters were systematically identified by the police (with public help), shamed by the media and harshly punished by the courts. So much for the anonymity of the mob.

Now compare all that to the UK government reaction to the financial crisis. No shock-and-awe for the bankers. There have been a few prosecutions in relation to specific scams such as the Libor-rigging scandal. Oh, and someone had their knighthood cancelled. But that’s about it.

It would seem that recklessly crashing the global economy is an almost crime-free activity.

Further reading

Ten years on from the crash, the most important banking reform has still not been enacted

By Liam Halligan

5. The beneficiaries of QE

Of course, that’s not to say that the financiers weren’t targeted by the state. Indeed, they were singled out… for a massive programme of assistance.

There were the immediate bailouts of failing banks, but also a much longer period of Quantitative Easing or QE. Though presented as a general tonic for ailing economies, QE has the specific effect of inflating the value of financial assets and therefore rebuilding the bankers’ balance sheets (and boosting the investment portfolios of the wealthy).

The mechanics of the policy also generates a cascade of transactions on which fees can be charged – another nice little earner for those lucky enough to benefit.

Even if we accept the argument that governments had no choice but to resort to QE, it remains a profound injustice that the sector responsible for the original crisis has profited so handsomely from the emergency treatment.

But don’t expect any meaningful process of ‘financial truth and reconciliation’. The brain-aching complexity of QE is precisely what allows governments to get away with not having untangled it.

6. The nuclear industry

When the Conservative Government came to power in 2010 one of its first moves was to slash subsidies for renewable power. Quite right too – the leading renewable technologies were considered capable of delivering more for less, and that’s exactly what they’ve achieved. Despite self-serving predictions that the industry would shrivel without generous subsidies, it has thrived – cutting costs and expanding capacity.

No such market discipline for the nuclear sector, however. Hinkley Point C – the first new nuclear power station to begin construction since the 1980s – is to receive a guaranteed and very expensive price for its electricity over 35 years. So assuming it’s up and running by 2025, we’ll still be paying for its overpriced electricity in 2060.

By the way, the nuclear tech we’re getting for this money – the European Pressurised Reactor – is  dogged by a history of engineering problems and cost overruns.

How on earth did we end-up with this radioactive lemon? Well, it was the first – and, so far, only – opportunity to guarantee a future for Britain’s nuclear industry (even if most of the kit is imported from the French).

No industry and no technology should be owed a living – and certainly not one with nuclear’s record of failure.

7. The rail industry

Speaking of enormously expensive things that don’t turn up on time, let’s talk about our trains.

The Train Operating Companies (TOCs) aren’t best-loved by British public. But this year, with the biggest timetable changes for at least a decade, was the chance for a reset. It was really important then that the whole thing went smoothly.

It was a disaster – with services in the North and South East of England descending into chaos.

The regulator’s report into the fiasco found that the TOCs, Network Rail, the Department for Transport and indeed the regulator all made mistakes – but also that it was unclear as to who was responsible for what.

The obvious conclusion is that the structure of the industry is unsustainable. Of course, if no one has ultimate responsibility then no one can be held ultimately accountable (right up to the Secretary of State for Transport) – which suits all concerned. Except the passengers, of course.

Further reading

Can we reform our rancid political debate?

By Douglas Murray

8. Air polluters

At least most trains are electric these days, which means they don’t belch out the airborne pollutants linked to 40,000 premature deaths in the UK every year and billions of pounds’ worth of damage.

The disastrous decision to encourage the use of diesel engines in Europe can be blamed primarily on the German government and the Volkswagen emissions scandal. However, the British government has repeatedly failed to take the action necessary to clean up the air in our worst-affected cities – or say, in sufficient detail, how it plans to fulfil its legal responsibility to do so.

The long-term solution is to switch to electric vehicles, but we also need a short-term solution. The difficulty isn’t that we don’t know what to do (ie, dis-incentivise the use of polluting vehicles in vulnerable urban areas); it’s that it wouldn’t be popular with motorists.

The most powerful vested interests are the ones composed of millions of people. The trouble is that also leaves millions of people breathing polluted air – but that’s OK because a lot of those are children and they can’t vote.

9. The carpetbaggers of London

On to another kind of grubbiness. How is the Government getting on with its repeated promises to do something about the foreign money laundered through London’s property market?

Very slowly, is the answer. Almost 100,000 properties in the UK are owned by offshore companies. To its credit, the Government is forcing these publicly to register their “beneficial owners” – though not until 2021. Better late than never, but one has to wonder how so much information about so many properties is going to be verified.

Of course, this would be a much smaller problem if the ownership of high-end property in the UK weren’t so lightly taxed (and therefore ridiculously attractive). One would assume that most foreign investment in London real estate is legitimate; but one has to ask: who benefits?

Certainly not the ordinary working people and productive enterprises priced out of their own capital. And not those who pay heavy taxes on the fruits of their labour because their government won’t shift the burden on to idle wealth.

London and other British cities should be fully open to genuine entrepreneurs and innovators from around the world. But we don’t need more speculators; we’ve got quite enough of our own.

Further reading

What's killing the Conservatives?

By James Kirkup

10. Government itself

Let’s conclude with the vested interest closest to home – the machinery of government and the wider political system. The Conservatives came to power promising a revolution in the way that we’re governed. The 2010 Conservative manifesto was entitled Invitation to Join the Government of Britain and promised a “Big Society” in place of a “Big State”.

There have been some reforms – most notably a significant devolution of power to cities. But, on the whole, the status quo remains intact. Parliament, Government and the Civil Service all work in much the same way as they did in 2010. Even the most straightforward reforms, like a modest reduction in the number of MPs from 650 to 600, have yet to be delivered. 

Others have been scrapped – such as the introduction of “extended ministerial offices“. These were a tiny move to towards reducing the dependency of Cabinet ministers on the civil service – and on Downing Street. Of course, even that proved too much of a threat to the established order.

And thus a sclerotic system of government struggles on – unable and unwilling to confront its own vested interests, let alone anyone else’s.

But then, having snatched control of the global economy from the drunk drivers in Wall Street and the City, international leaders handed it back – without addressing the roots of the crisis. Unsurprisingly, we are once again seeing the same conditions which precipitated the crash the first time around.

Here are four reasons to be worried:

1. The Banks are even bigger

In 2009, former Chair of the Federal Reserve Alan Greenspan pointed out that if banks are “too big to fail, they’re too big” – a lesson that should have been obvious from the massive bail outs. Yet in the years since the crash the sector has grown even more concentrated. Just six banks now manage half of the assets of the entire banking industry. To take just one example, JPMorgan has amassed a huge $2.56 trillion in assets, nearly double what it had at the end of 2006. The ‘moral hazard’ is obvious: banks which are ‘too-big-to-fail’ can seek high-risk, high-return strategies in the knowledge that the government will have to rescue them in times of crises.

2. The regulations are getting weaker

In the wake of the crash, politicians and pundits promised tighter regulation to prevent future crises. Democrats in America pushed through the Dodd-Frank Act in 2010, introducing mandatory stress tests and significant capital requirements for all big banks. In the eight years since, the sector’s formidable lobbying power has been employed to water down these reforms. A record $2 billion was spent by Wall Street on the 2016 US election cycle, and earlier this year, the largest two banking lobby groups – including 48 of the largest banks – combined to create the Bank Policy Institute to lobby the Trump administration for a roll-back of regulations. Just this week the Wall Street Journal revealed that the Federal Reserve was considering redefining the definition of a ‘big bank’ in order to lower regulatory costs for more regional financial institutions.

3. The debt is riskier

A decade of loose monetary policy has seen excessive risk spread outside the banking sector, with the share of corporate bonds with a BBB rating (one above junk) reaching nearly 50% in both US and Euro Areas, significantly higher than the pre-crisis peak. Corporate bonds, debts securities used by companies to raise finance, make attractive investments because of the high-yields they offer; but they do so precisely because they are very risky. One of the major causes of the last crash was the highly rated bonds that turned out to be riskier than advertised. But even if bonds are correctly classified, if low-rated bonds make up too much of the market, the risk of crisis in the event of a slump is heightened.

4. Consumers keep borrowing

Consumers, too, have been making the most of loose credit. Concerns have already been raised about unsustainable borrowing in the auto finance industry, from which UK households borrowed almost £32 billion in 2016. These finance arrangements allow people to acquire a vehicle for a period, paying monthly fees, before handing it back, trading it, or buying it outright. Lenders make these loans on the hope that the resale value of the car will rise against estimates, should consumers decide to return the vehicle. The industry claims that it is secure: sub-prime consumers only account for 3% of the market and data from the second-hand market allows them to calculate the value of depreciation on a car to within a few pounds. Supposedly, this prevents them from under-pricing loans and finding themselves stuck with a fleet of cars worth little more than scrap.

But there is reason to be sceptical. The credit-scoring policies used remain secret in the UK, and let’s not forget, Wall Street and the City – on the back of complex mathematical modelling – assured us of the safety of their new financial products before they imploded. An economic downturn could lower demand for used cars at the same time as reducing the ability of consumers across the country to meet the terms of their deals. Particularly worrying, almost half of Britons who have taken out car finance deals confess that they don’t understand the small print of their own deals.

Suggested reading

Nomi Prins: The central banking heist has put the world at risk

By Liam Halligan

More generally, household debt in the US is at an all-time high of $13.2 trillion. This may have been sustainable through the long era of low interest rates – 2018 was the first year that rates rose above 0.5% since 2008 – but as rates rise consumers may struggle to meet debt obligations. That could be all the shock required to start another negative spiral.

If Morgan Stanley are to be believed, there’s a recession coming around 2020 – there’s no way of knowing if it will cause damage on the scale of 2008, but as these four risks show, we’re not much less vulnerable. The global response to 2008 was to put the pre-2008 world on life support, rather than deal with the fundamental structural problems that led to the crash. This time around, those short-term fixes might not be available – in 2009, central banks had the headroom to cut interest rates, but today rates are still rock bottom – and with international leaders locking horns over tariffs and Syria, the prospects for global action are even gloomier.

Suggested reading

Ten years after the crash, we should still be terrified

By Peter Franklin

I’m in favour of restriction. The biggest problem with the British economy – and with Western capitalism in general – is not too little freedom, but too much. Too much, that is, for those who make it their business to increase their share of existing wealth without creating any. This is what economists call rent-seeking (which includes, but isn’t limited to, what tenants pay to their landlords).

Rent-seekers are able to extract value from others because of the monopoly rights that the state gives them over a particular resource – be it land, intellectual property, permission to pollute, political power or something else. Rent-seeking is therefore a result of government policy. Unsurprisingly, governments find themselves relentlessly lobbied by those with a vested interest in maintaining the unjust, opportunity-sapping status quo.

Further reading

What the Tories need in their next leader

By Graeme Archer

Taking on those vested interests requires courage and determination. But that’s why a government – especially one that believes in the opportunity to create rather than extract wealth – should be judged on the quality of its enemies.

Here are ten enemies that the Cameron and May governments should have made, but didn’t:

1. Land owners

Conservatives believe in the right to private property. And so they should. But that right shouldn’t include the uplift in value created when land becomes ripe for development.

The price of farmland can shoot up from less than £10,000 to more than £1,000,000 an acre just because of a planning decision. The act of merely owning the land has contributed precisely nothing to this added value – and yet landowners are able to claim the lion’s share of it.

This injustice, which Winston Churchill condemned back in 1909, lies at the heart of the housing crisis – a crisis which is destroying the Conservative ideal of a property-owning democracy and therefore popular support for conservatism among younger people.

If the Government did something about legal barriers that prevent it from acquiring land at agricultural-use value to build new housing, then a whole range of opportunities could open up. Instead, it continues to side with a few lucky farmers rather than millions of aspiring home owners.

2. The big developers

Of course, if we built more houses, the law of supply and demand would mean lower prices and reduced profits for those lucky landowners, right?

Wrong – and so is the idea that the planning system is mostly to blame for the dearth of new homes. In fact, there’s a huge backlog of unused planning permissions – leading to accusations that the big developers are “land banking”; ie, manipulating the development of the land they hold to control prices.

Of course, that can’t be possibly be true, because the Government has commissioned an investigation – the Letwin Review – which has been taken as evidence that developers don’t land bank. However, the Independent Review of Build Out Rates, Draft Analysis, June 2018, also says this:

“The fundamental driver of build out rates once detailed planning permission is granted for large sites appears to be the ‘absorption rate’ – the rate at which newly constructed homes can be sold into (or are believed by the house builder to be able to be sold successfully into) the local market without materially disturbing the market price.”

Deliberately restricting supply in order to stop prices from falling? How is that not manipulating the market?

It’s plainly obvious what’s going on. The Government must stop hiding behind jargon like “absorption rates” and take land supply out of the developers’ control.

3. Nimbys and cowboys

The planning system isn’t entirely free from blame. A particular problem is the designation of green belts around urban areas. Preventing sprawl is a worthy objective, but choking the growth of prosperous cities such as Oxford and Cambridge is not. Model developments like Poundbury in Dorchester, show that we can build beautifully designed extensions to towns and cities that enhance local life instead of harming it.

However, instead of negotiating a grand bargain on sustainable urban development, the Government has failed to confront the green belt fundamentalists, while turning a blind eye to ugly, piecemeal development in unprotected areas – the worst of both worlds.

4. The bankers

In August 2011, riots erupted across urban England. But what happened next was just as remarkable: a shock-and-awe demonstration of the power of CCTV. Rioters were systematically identified by the police (with public help), shamed by the media and harshly punished by the courts. So much for the anonymity of the mob.

Now compare all that to the UK government reaction to the financial crisis. No shock-and-awe for the bankers. There have been a few prosecutions in relation to specific scams such as the Libor-rigging scandal. Oh, and someone had their knighthood cancelled. But that’s about it.

It would seem that recklessly crashing the global economy is an almost crime-free activity.

Further reading

Ten years on from the crash, the most important banking reform has still not been enacted

By Liam Halligan

5. The beneficiaries of QE

Of course, that’s not to say that the financiers weren’t targeted by the state. Indeed, they were singled out… for a massive programme of assistance.

There were the immediate bailouts of failing banks, but also a much longer period of Quantitative Easing or QE. Though presented as a general tonic for ailing economies, QE has the specific effect of inflating the value of financial assets and therefore rebuilding the bankers’ balance sheets (and boosting the investment portfolios of the wealthy).

The mechanics of the policy also generates a cascade of transactions on which fees can be charged – another nice little earner for those lucky enough to benefit.

Even if we accept the argument that governments had no choice but to resort to QE, it remains a profound injustice that the sector responsible for the original crisis has profited so handsomely from the emergency treatment.

But don’t expect any meaningful process of ‘financial truth and reconciliation’. The brain-aching complexity of QE is precisely what allows governments to get away with not having untangled it.

6. The nuclear industry

When the Conservative Government came to power in 2010 one of its first moves was to slash subsidies for renewable power. Quite right too – the leading renewable technologies were considered capable of delivering more for less, and that’s exactly what they’ve achieved. Despite self-serving predictions that the industry would shrivel without generous subsidies, it has thrived – cutting costs and expanding capacity.

No such market discipline for the nuclear sector, however. Hinkley Point C – the first new nuclear power station to begin construction since the 1980s – is to receive a guaranteed and very expensive price for its electricity over 35 years. So assuming it’s up and running by 2025, we’ll still be paying for its overpriced electricity in 2060.

By the way, the nuclear tech we’re getting for this money – the European Pressurised Reactor – is  dogged by a history of engineering problems and cost overruns.

How on earth did we end-up with this radioactive lemon? Well, it was the first – and, so far, only – opportunity to guarantee a future for Britain’s nuclear industry (even if most of the kit is imported from the French).

No industry and no technology should be owed a living – and certainly not one with nuclear’s record of failure.

7. The rail industry

Speaking of enormously expensive things that don’t turn up on time, let’s talk about our trains.

The Train Operating Companies (TOCs) aren’t best-loved by British public. But this year, with the biggest timetable changes for at least a decade, was the chance for a reset. It was really important then that the whole thing went smoothly.

It was a disaster – with services in the North and South East of England descending into chaos.

The regulator’s report into the fiasco found that the TOCs, Network Rail, the Department for Transport and indeed the regulator all made mistakes – but also that it was unclear as to who was responsible for what.

The obvious conclusion is that the structure of the industry is unsustainable. Of course, if no one has ultimate responsibility then no one can be held ultimately accountable (right up to the Secretary of State for Transport) – which suits all concerned. Except the passengers, of course.

Further reading

Can we reform our rancid political debate?

By Douglas Murray

8. Air polluters

At least most trains are electric these days, which means they don’t belch out the airborne pollutants linked to 40,000 premature deaths in the UK every year and billions of pounds’ worth of damage.

The disastrous decision to encourage the use of diesel engines in Europe can be blamed primarily on the German government and the Volkswagen emissions scandal. However, the British government has repeatedly failed to take the action necessary to clean up the air in our worst-affected cities – or say, in sufficient detail, how it plans to fulfil its legal responsibility to do so.

The long-term solution is to switch to electric vehicles, but we also need a short-term solution. The difficulty isn’t that we don’t know what to do (ie, dis-incentivise the use of polluting vehicles in vulnerable urban areas); it’s that it wouldn’t be popular with motorists.

The most powerful vested interests are the ones composed of millions of people. The trouble is that also leaves millions of people breathing polluted air – but that’s OK because a lot of those are children and they can’t vote.

9. The carpetbaggers of London

On to another kind of grubbiness. How is the Government getting on with its repeated promises to do something about the foreign money laundered through London’s property market?

Very slowly, is the answer. Almost 100,000 properties in the UK are owned by offshore companies. To its credit, the Government is forcing these publicly to register their “beneficial owners” – though not until 2021. Better late than never, but one has to wonder how so much information about so many properties is going to be verified.

Of course, this would be a much smaller problem if the ownership of high-end property in the UK weren’t so lightly taxed (and therefore ridiculously attractive). One would assume that most foreign investment in London real estate is legitimate; but one has to ask: who benefits?

Certainly not the ordinary working people and productive enterprises priced out of their own capital. And not those who pay heavy taxes on the fruits of their labour because their government won’t shift the burden on to idle wealth.

London and other British cities should be fully open to genuine entrepreneurs and innovators from around the world. But we don’t need more speculators; we’ve got quite enough of our own.

Further reading

What's killing the Conservatives?

By James Kirkup

10. Government itself

Let’s conclude with the vested interest closest to home – the machinery of government and the wider political system. The Conservatives came to power promising a revolution in the way that we’re governed. The 2010 Conservative manifesto was entitled Invitation to Join the Government of Britain and promised a “Big Society” in place of a “Big State”.

There have been some reforms – most notably a significant devolution of power to cities. But, on the whole, the status quo remains intact. Parliament, Government and the Civil Service all work in much the same way as they did in 2010. Even the most straightforward reforms, like a modest reduction in the number of MPs from 650 to 600, have yet to be delivered. 

Others have been scrapped – such as the introduction of “extended ministerial offices“. These were a tiny move to towards reducing the dependency of Cabinet ministers on the civil service – and on Downing Street. Of course, even that proved too much of a threat to the established order.

And thus a sclerotic system of government struggles on – unable and unwilling to confront its own vested interests, let alone anyone else’s.

The crash was the ultimate demonstration of market failure – and, many would argue, the failure of free market ideology.

A particular bugbear is the ‘efficient-market hypothesis‘, which is the theory that asset prices fully reflect all available information. The fact that ten years ago the value of entire companies and asset classes collapsed overnight is surely proof that the hypothesis is wrong.

Except that depends on what you mean by ‘value’. More than two millennia before the hypothesis was formulated, Publilius Syrus said “Anything is worth what its purchaser will pay for it.”

In that respect, markets are never wrong. Indeed, modern markets have never been more right – because they gather information about more purchasers (and what they’re willing to pay) than ever before.

Further reading

How (some) economists finally caught up with financial reality

By Peter Franklin

One can object that this is missing the point – and that what purchasers are willing to pay for something can become totally detached from any rational assessment of its ‘deeper’ value (however one might want to define that).

Fair enough. But were the people responsible for the stability of the global financial system oblivious to this reality?

No, says Sebastian Mallaby in the Washington Post. The idea that “blind faith in markets” stopped the likes of Al Greenspan (chairman of the Fed before the crash) from seeing the warning signs is itself deeply flawed:

“Contrary to myth, Greenspan himself never believed that markets were efficient. In his youth, he wrote lucidly about bubbles and crashes and regarded market inefficiencies as so obvious that he sought to exploit them by day trading… As Fed chairman years later, Greenspan frequently reminded his colleagues that periods of prosperity could be punctured by ‘irrational exuberance’ in financial markets.”

Mallaby puts the blame not on market failure, but state failure.

The fact than an extensive system of financial regulation existed before the crash indicated that policy-makers were well aware of the potential of markets to go haywire. The real problem was that the regulatory framework was not fit for purpose:

“…the reality [was] that political constraints, not intellectual failures, prevented policymakers from curbing the housing mania. Nobody remembers that in 2001 the Greenspan Fed banned the most abusive subprime mortgages, for the good reason that the ban was circumvented. But why was it circumvented? The answer is that the capture of Congress by financial lobbies ensured the balkanization of regulation into an alphabet soup of agencies, many of them underfunded and ineffective.”

Though the financial lobbyists were representing private sector interests, they were pushing at an open door: both literally in having the run of legislatures and government departments; but also metaphorically given the state’s addiction to debt as facilitated by the money markets.

And it wasn’t just in America, of course. In the UK, Gordon Brown’s ‘tripartite’ system of financial regulation also produced an “alphabet soup of agencies”. As for continental Europe, one only has to look at how Greece ‘qualified’ for Eurozone membership to recognise the extent of state complicity in the causes of the ensuing financial calamities.

Further reading

The permanent punishment of the Greek people

By Peter Franklin

Mallaby makes a number of excellent points, but that doesn’t mean we should absolve the theoreticians of all responsibility.

The politicians were never blind to the potential for market failure. Where governments and financial institutions did go wrong, however, was their unfounded degree of confidence in their ability to manage the consequent risks. As Nassim Nicholas Taleb warned at the time, the risk models the regulators and bankers relied upon were deeply flawed – and for that we can certainly blame the theoreticians.

Ten years on from the crash what should worry us isn’t the risk of market failure. That, like death and taxes, we can assume. What should keep us up at night is that the debt that magnifies those risks hasn’t gone way – and nor has the false confidence of the risk managers.

Such strong, withering analysis is, perhaps, unexpected from someone who has held senior roles at Wall Street finance houses such as Bear Stearns and Goldman Sachs. But Prins is no ordinary former banker.

The US author and journalist left the financial services industry in 2001. She did so, in her own words, “partly because life was too short”, and “partly out of disgust at how citizens everywhere had become collateral damage, and later hostages, to the banking system”.

Since then, Prins has chronicled the closed and often confusing world of high finance through the 2008 crisis and beyond. Her writing combines deep insider knowledge with on-the-ground reporting with sharp, searing prose. Alongside countless articles for New York Times, Forbes and Fortune, she has produced six books – including Collusion: how central bankers rigged the world, which has just been published.

Her main target in the new work is “quantitative easing” – described by Prins as “a conjuring trick” in which “a central bank manufactures electronic money, then injects it into private banks and financial markets”. Over the last decade, she tells me when we meet in London, “under the guise of QE, central bankers have massively overstepped their traditional mandates, directing the flow of epic sums of fabricated money, without any checks or balances, towards the private banking sector”.

Further reading

Britain should not fear "no deal" with the EU on trade

By Liam Halligan

Since QE began, in the aftermath of the financial crisis, “the US Federal Reserve has produced a massive $4.5 trillion of conjured money, out of a worldwide QE total of around $21 trillion”, says Prins. The combination of ultra-low interest rates and vast monetary expansion, she explains, has caused “speculation to rage … much as a global casino would be abuzz if everyone gambled using everyone else’s money”.

Much of this new spending power, though, has remained “inside the system”, with banks shoring up their balance sheets. “So lending to ordinary firms and households has barely grown as a result of QE,” says Prins, “nor have wages or prosperity for most of the world’s population”. Instead, “the banks have gone on an asset-buying spree”, she explains, getting into her stride, “with the vast flow of QE cash from central banks to private banks ensuring endless opportunities for market manipulation and asset bubbles – driven by government support”.

Prins describes “the power grab we’ve seen by the US Federal Reserve, the European Central Bank, the Bank of Japan and other central banks”. Using QE, she argues, “these illusionists have altered the nature of the financial system and orchestrated a de facto heist that has enabled the most dominant banks and central bankers to run the world”.

She says all this looking me straight in the eye, with the deadpan delivery, supreme confidence and unflinching focus of the senior investment banker she was. But the words are those of an angry and committed activist – someone who is absolutely determined to do what she can to reform global finance, starting in her native country.

Nomi Prins deals in bold statements and fearless analysis. While often accused of hyperbole, her deep research, financial expertise and former ‘insider status’ means only a fool would dismiss her. She is just at home within academia as she is on the political front line – a regular on the university lecture circuit, Prins was also a member of Senator Bernie Sanders’ team of economic experts, advising on central bank reform. Yet, such is her reputation that she commands a place among those she chides – and is regularly consulted, formally and informally, by senior officials at the Fed, the ECB and other major central banks.

Surveying the history of the response to the 2008 financial crisis, Prins tells me that explicit bank bailouts were only a small part of the story. “First, there was the $700bn package agreed in Congress to save the US banks that caused the crisis,” she says. “But the real bailout was the trillions of dollars of QE produced by the Fed – a massive subsidy to banks and financial markets, that has created an enormous bubble, a subsidy agreed by unelected officials and barely debated or remarked upon.”

After initiating QE in late 2008, the Fed then “exported the idea – and that required the collusion of other major central banks”, Prins argues. She points out that even though the Fed and the Bank of England have currently stopped doing QE, new money amounting to hundreds of billions of dollars a month is still being pumped out by central banks elsewhere, not least the ECB and the Bank of Japan.

“When the asset bubble pops, the fragile financial system and the broader economic environment could be thrown into deep depression and turmoil,” she says. “That’s why the QE baton has been passed from the US to other nations, and why the central banks are so desperate to collude.”

I put to Prins the conventional wisdom: there was no alternative to QE, and without it, the global banking system would have collapsed in 2008, causing untold economic and political damage. While she accepts there was a need for immediate post-crisis action, she argues the time for emergency measures has now long since passed. “If financial markets so much as wobble, the world’s leading central banks, between them, do more QE,” she says. “The insiders maintain the status quo of subsidies to the financial system – but there is no world war, aliens are not invading our planet, this is totally unjustified.”

Prins says that QE has been “a massive deceit and a huge factor in driving inequality – a dedicated effort by institutions with the ability to create money, deciding that it doesn’t go to ordinary people”. While it was sold “as a massive trickle-down programme, helping the incomes of regular households, the benefits have been focused at the very top”.

Stock markets have benefitted, she acknowledges, “but a mere 10% of Americans own 85% of the market”. Prins also argues that low interest rates have harmed most Americans. “We need to normalise the rate environment, so ordinary people get some kind of return on their pensions and savings,” she says.

QE and low rates, says Prins, have also caused “a debt explosion” – as not only have governments taken on more borrowing but financial institutions have too, keen to boost the scale of their investments in QE-driven markets that look like a one-way bet. US government debt has soared from $9 trillion to over $20 trillion since the financial crisis, Prins observes. “And public and private debt combined amount to a staggering 225% of global GDP – much of it accumulated since the financial crisis,” she says.

“The next financial crisis will be sparked by a debt failure somewhere – then this QE bubble will pop very quickly,” Prins predicts. “And when the new crisis comes, rates are already low and we have little in the way of fiscal ammunition, so mitigation will be very tough – and it will be ordinary people who suffer the most”.

In response to the financial crisis, Prins maintains it would have been far cheaper and more effective for the state to intervene directly, providing explicit assistance to cash-strapped householders struggling to service the distressed mortgages at the heart of the crisis. “There was half a trillion dollars of sub-prime mortgages across the US in 2008,” she recalls. “You could have bought up these properties, or just temporarily covered the loans,” she says. “That would have cost much less than half a trillion, and would also have helped the banks by turning their junk assets into performing loans.”

Prins says the “banks and central banks together” instead concocted QE. “We’ve allowed a grotesque $21 trillion global subsidy which has seen the bankers not only avoid punishment for the huge mess they created, but then entrench their financial advantage even more.”

What we need, she says, is “better regulation” – in particular, a return to the “Glass-Steagall environment where investment banks can’t leverage their balance sheets by so much and rely on government support”. Since the Depression-era separation between risky investment banking and run-of-the-mill commercial banking was repealed by the Clinton administration in 1997, “a financial crisis was unavoidable”, she says. “As long as the deposits of ordinary people and companies can be used by investment bankers as fodder for reckless speculation, in the knowledge those deposits are backed by the state, the world is at risk.”

Further reading

Ten years on from the crash, the most important banking reform has still not been enacted

By Liam Halligan

Prins is dismayed at how easily on-going QE, continuing years after the financial crisis, has been accepted by the political and media classes. “There is joint approval across the middle of the left-right spectrum,” she says. “The economics profession and almost all commentators don’t seem to care that this money is completely unaccountable and untracked – and has caused an enormous bubble.” The reason, she observes, is that contemplating the end of QE is too difficult. “The unwind will cause pain and could result in a meltdown, as the markets and the debt mountain collapse.”

In Collusion, Prins takes us on a whistle-stop tour of global finance, describing how the leaders of the Banco de México tried to navigate their country’s complicated relationship with the Fed and how Brazil has led the charge in challenging the dollar’s all-important “reserve currency status”. The book goes to China, where we learn how Beijing is using “dark money” to upend dollar-hegemony, helping to drive the country’s ascent as a global superpower.

We read how Europe’s response to the financial crisis has heightened tension between the ECB and Germany – fuelling intra-EU resentments that have fuelled populism and help explain Brexit. Prins describes how Japan “leverages the rivalry between the US and China”, while embarking on “the most ambitious money-conjuring scheme to date”.

Further reading

Capitalism's richest got richer from central bank responses to 2008's bust (as well as from the boom before it)

By Liam Halligan

But it is in the US where the bulk of the narrative is set and it is there the arguments Prins makes will be most keenly read. The Federal Reserve has just lifted interest rates by a quarter point, and signalled that two more increases are likely in 2018. As the world’s most important central bank continues the long, gradual march away from emergency measures, and with the ECB also committed soon to ending QE, the warnings in this important book about extent of today’s asset price bubbles, and the role central banks have played in causing them, are about to be severely tested.

“What we’ve witnessed, since 2008, is the unbridled ability of the so-called people at the top to implement socialism for the banks,” Prins tells me. “If anyone had said we are going to give $21 trillion to the global banking sector, it would never have happened – so we’ve had a backdoor process instead, under the pretense it would help ordinary people.”

Leaning forward for the first time, Prins ups the ante. “Well, real people don’t believe that – and they’ll believe it even less as and when we have another crash, a crash off the back of ten years of emergency measures that were supposed to fix the system.”

“The issue isn’t whether this money-conjuring game can continue,” she says as she prepares to leave. “The issue is that central banks have no plan B in the event of another crisis – and that’s going to create an even more massively negative view among ordinary people towards those who see themselves as elites.”

Listen to Liam Halligan’s interview with Nomi Prins here:

Easy enough, you might think – but try the following example, from a Bloomberg article by Lionel Laurent:

“[This business] lends $1 billion to small businesses in 12 months, holds $150 billion in corporate bonds, runs the world’s largest money-market fund, offers mobile payments and credit cards, and gives customers cash balances that can be topped up across thousands of homely bricks-and-mortar outlets.”

Surely, that could only be some kind of bank – except that it’s Google.

These days we hear a lot about ‘FinTech’ – i.e. when finance companies use hi-tech to deliver new services. However, we should also keep a watch on what I’m calling ‘TechFin’ i.e. financial services from tech companies:

“Google offers payments; Apple Inc. invests its cash in company securities; Amazon.com Inc. lends money and offers account balances in-store; Alibaba Group Holding Ltd. manages customer funds like an asset manager.”

Predictably, the ‘proper’ banks aren’t happy:

“Finance firms are lobbying heavily against an application by Square Inc., a fintech start-up run by Twitter co-founder Jack Dorsey, to be regulated as an industrial loan corporation, a kind of halfway house between bank and non-bank.”

As Laurent puts it, the established players don’t like the big tech companies “nibbling at the best bits of finance without actually taking on the burden of being a licensed bank.”

Banking may well have its burdens, but also has its privileges – not least the bail-outs that saved the sector after the credit crunch, not to mention less visible forms of corporate welfare like QE and state intervention to prop-up the property market.

If Facebook was facing bankrupcy would the US government bail it out? It seems unlikely – after all there’s no such thing as a ‘run’ on a social media network. If a tech company goes bust it doesn’t threaten the stability of the entire sector – or the economy as a whole. The loss of technical support may be a problem, but if significant numbers of people are relying on the company’s proprietary tech, it’ll probably be acquired by another company. As big as the big tech companies are, they’re not too big to fail.

However, that might change if their sidelines in financial services keep on growing and/or become part of the Jenga-stack that is the financial system.

Lionel Laurent indicates that were not at that point yet:

“One reason why shadow finance is so popular is the wave of rules brought in after the financial crisis designed to shrink the banking industry. If risk is being spread across non-systemic actors who are unlikely to need a government bailout if things go wrong, what’s the problem? Tech firms, along with funds and insurers offering direct lending, are filling a void left by banks – not destabilizing the system, reckons Norm Champ, a partner at law firm Kirkland & Ellis. They’re unlikely to go much further for now.”

The future could look very different though. FinTech has the potential to disrupt the sector – and have a lot more software engineers than the banks do. The likes of Google and Facebook are also sitting on enormous cash piles that they need to find a use for. Put the tech and the cash together (not to mention all the data they have on their customers) and you have the makings of a highly consequential challenge to the established financial institutions.

Perhaps instead of lobbying against new banks, the old banks could lobby against the tax avoidance that allows Silicon Valley to accumulate so much money in first place.

Of course, the bankers might think that too dangerous a thread to be pulling on.

Recommended listening

Meet Anthony Thomson, the man who broke 'the bank'

By Charlotte Pickles

• Around 70% of personal current accounts in Britain are held by the “Big Four” banks (HSBC, Lloyds, Barclays, RBS)
• Only 6% of Britons have changed their day-to-day bank account in the past three years, 9% have switched their savings account and 10% their cash ISA
• 60% of British adults have been with their current account provider for at least a decade

The retail banking market in Britain is highly concentrated, with a Competition and Markets Authority investigation concluding in 2016 that market features, including low levels of customer engagement and incumbency advantages, were leading to “adverse effects on competition”. And a lack of competition is bad news for consumers.

The good news is that the UK’s financial regulators have acted to lower barriers to entry, and a (small) flurry of challenger banks have been established in the past few years. But while the choice in retail banking is increasing, consumers don’t seem to be exercising that choice.

I asked Anthony Thomson – co-founder of the first British app-based bank Atom, and until January its Chairman – why this was the case. Why aren’t consumers switching? Why isn’t competition working? Competition, he said, only really delivers added value if it drives differentiation, and we’re only just seeing that happen (Atom, for example, only opened to all customers in 2016). It’s not, contrary to popular opinion, that switching is seen as too much hassle, it’s that consumers simply don’t see the point. Banks aren’t yet giving customers a compelling enough reason to switch.

Take gyms. The market offers consumers a genuinely diverse choice. I can pay high membership fees and get all sorts of benefits – from the latest fitness classes to luxury shower products – or I can pay comparatively very little and get the basics, no bells and whistles. As for the banks, while traditional ones have tried to entice customers with “rewards” – £100 if you switch, 2% cashback on utility bills, £125 high street gift card – when you look behind the offer, it’s all much of a muchness. The equivalent of putting a glossy front-end on a creaking legacy system.

The corporate culture that puts profit above everything else is partly to blame for the failure of the traditional banks to really compete, according to Thomson:

“The great malaise in UK Plc today in general and in banks in particular is they think they exist to make money, they’ve lost sight of the customer.”

Which isn’t to say that businesses shouldn’t make money; but companies that are more interested in chasing quarterly earnings targets than increasing customer satisfaction are unlikely to invest in innovative, customer-centric products.

This is where the new generation of British challenger banks come in. Entirely-app based ones, such as Atom, Monzo and Starling, are truly disruptive. No bricks and mortar, no call centres, none of the baggage of a traditional bank. With significantly lower overheads, app-based banks can offer better rates for customers, and in an increasingly digital world, a more hassle-free experience.

Recommended reading

Will business put its money where its mouth is?

By Charlotte Pickles

But it’s still early days, which helps explain why the challengers (or ‘neobanks’) aren’t yet threatening the market share of traditional banks. Atom doesn’t offer a current account (only savings and mortgages) and Monzo’s current account is not open to all customers. These 100% digital banks are differentiated, but they don’t have scale. And achieving scale requires capital. As Thomson explains, the greatest barrier to greater diversification in retail banking is not obtaining a banking licence but securing that capital. Investors willing to put up risk capital at the start, on the basis of a business plan, and not a tried and tested product, make up a small pool.

Yet there are reasons to be hopeful. People’s financial habits are changing: look at online banking, and the growth of new payment platforms and alternative sources of credit. Traditional banks look archaic to generations brought up online. And with the roll out of open banking, as Thomson enthuses, the potential for transformative disruption in the sector is huge – Google ‘bank’ anyone?

Meanwhile, in America, where digital challenger banks aren’t making much progress, a fully integrated model, which links your finances to the rest of your life, and offers hyper-personalised advice, offers and rewards might just spell the end of ‘the bank’ as we know it.

All this data-driven banking obviously won’t wipe away centuries of incumbency advantage overnight, but it will help crack open the current oligopolistic markets – which is why, as Thomson points out, the ‘big boys’ don’t like it.

Oh, and if you fancy setting up your own bank, listen to find out Thomson’s five ‘easy’ steps to doing so…

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You can also listen to the full interview as a podcast…

https://soundcloud.com/user-970100804/meet-anthony-thomson-the-man-who-broke-the-bank/s-We7YO