St Paul's Institute

Was it Just a Banking Crisis?

by The Rt Revd Dr Peter Selby

Posted: 20 Sep 2011

With more or less reluctance the proposals to reconstruct the banking sector are being accepted as either desirable or inevitable. Increasing the fractional reserve and insulating the 'retail' functions of the banks from their investment function are seen as the means to prevent the 2008 crisis from recurring. And if it should happen that the investment arm of a bank overreaches itself or falls victim to imprudence, human error or market volatility, the general population will not need to rush round to the Northern Rock - or anywhere else - to withdraw their savings, nor have their taxes used to bail out a sector seen as too important to fail.

The costs of the changes are real: the implementation costs are only part of it; insulation works both ways, as all of us who enjoy 'free banking' know well enough if we think about it, and will certainly know when some at least of the cross-subsidy from which we now benefit disappears. There are dark threats of banks relocating to places where they will not need to separate their functions in this way, but the proposals for change in this country will probably be a foretaste of changes that will happen on a global scale.

Nobody wants to live through another 2008, and while there may be short-term turbulence as the changes are brought in, and while bankers continue to express some concerns about the effect on their competitiveness, the proposals are widely found to be acceptable, by general public and by the government.

But when something claiming to be a radical restructuring gains that degree of acceptance we ought to be cautious. The theory of ring-fencing is that 'our savings and current accounts will be safe'. But where are our pensions, the major savings of most people, going to find themselves - on which side of the fence, that is? And if the area of greatest freedom includes those is it not rather disingenuous to convey to the general public that any future imprudence, market volatility or banking collapse will not unbalance the whole system?

The fact is, surely, that all of us are now dependent on the money markets and stock markets of the world, and that people who can by no stretch of the imagination be called rich will still be in serious danger, and the world economy will still be vulnerable to the excesses of greed and imprudence that brought the house of cards crashing to the ground. Just because the changes may mean that we don't again see queues of people trying to withdraw their money from Northern Rock doesn't mean that the possibility of the destitution of the population by the irresponsibility of some financiers has been done away.

Nor is that the only dimension of self-deception which I sense in what we are being offered, nor the only point at which I find myself questioning the sturdiness of this 'ring fence' that is being constructed. For what will survive the changes essentially unchanged is the fractional reserve banking system itself. A few more percentage points of capital reserves does not alter the fact that we shall continue to let the banks be the principal producers of money, funded by their multiplication of the deposits they hold - many of which have themselves been created by multiplying the deposits of other banks.

In short, the overwhelming proportion of the 'money supply' is the virtual, debt-based money we now have and will continue to have. That is the house of cards in which we live, and it is in that system that the roots of the 2008 disaster lay. All this was put to the Independent Commission, and it is no credit to its members that the issue was cavalierly dismissed. The reality is that it is not just 'speculative activity' that goes on outside the ring fence: we have allowed that activity to be the driver of the creation of money itself. What was needed in the wake of 2008 was a fundamental examination of the character of late capitalism - and the general acceptance of the proposed changes only confirms that that necessary if painful re-examination has been avoided.

And re-examination there will have to be. For there is a bill accumulating from this way of 'making' money, and the evidence of payback time's approach is easy to see. For if the money system is actually a big credit card, it can only lead to a plundering of the resources of the planet - the credit card whose payment date is getting nearer all the time as resource depletion and climate change show only too clearly.* And it will take more than a ring fence to protect us from that.

*I make this point in Grace and Mortgage: the Language of Faith and the Debt of the World (1997) and it is made more substantially in Mike Rowbotham's The Grip of Death. See also the website of the Christian Council for Monetary Justice.

About this author

The Rt Revd Dr Peter Selby is the former Bishop of Worcester. Following his role as part of the Interim Directing Team from 2012-2014, he continues as an adviser to St Paul's Institute.

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The opinions expressed in this article are those of the author, and do not necessarily represent the views of St Paul's Institute or St Paul's Cathedral.