Two years ago, you were mugged. So was I. So was everybody we know. You remember that night. The mugger wore a pin-striped suit from Saville Row, and when he cornered you at the cash machine, he said if you didn't hand over $1 trillion in cash guarantees now now now, he'd knife the global economy in the heart. Oh, he was polite enough: he called the mugging a "bank bailout," and promised that, sure, tomorrow he'd change my ways, so this will never happen again, guv'nor. But since then he has been laughing in your face -- and preparing for an even bigger mugging next time.
There was a time when we left the question of banking to nerds, wonks, and lobbyists. You can leave this question to them again, if you want -- but the price could be your job and your home.
To understand the renewed disaster that is waiting for us, you need to recap the story of how the bankers crashed the global economy. In the Great Depression of the 1930s, everybody realized the banks had behaved in a reckless and risky way with the people's money, and they resolved to never let it happen again. President Franklin Roosevelt called them "malefactors of great wealth", and said "I welcome their hatred." In response to public pressure, he introduced strict regulations. Banks had to behave conservatively. They couldn't take the deposits of ordinary people and gamble with them on Wall Street. They had to hold substantial capital reserves. They were locked in a golden cage, and similar rules spread across the world. For sixty years, it worked well.
Then in the 1990s the banks demanded to break free of these "outdated" rules. In the US, they gave massive donations to both political parties and in return demanded an end to regulation: it was legalized bribery. In Britain, the City threatened to simply move offshore, a method of intimidation that was just as effective. So suddenly the old rules were dismantled by Bill Clinton and Tony Blair. Now the financiers were allowed to run an unregulated "shadow banking system" with almost no rules. They could gamble with your cash. They could invent complex money-shuffling instruments like derivatives that nobody really understood, not even the people selling them.
And they could run most of their businesses "off balance sheet", turning their accounts into an elaborate fiction: Lehman Brothers claimed it had a net worth of $26 billion when it actually had a hole in its balance sheet of close to $200 billion.
Many people predicted that the invisible hand of the market would push the economy over a cliff. When Clinton's deregulation bills were pushed through, the Democratic senator Byron Dorgan was almost shaking as he said: "I think we will look back in ten years' time and say we should not have done this, but we did because we forgot the lessons of the past."
It all happened just as he predicted. By the time the banks were bankrupt, there was no choice. If our governments didn't bail them out, the cash machines would have run dry, and there would have been anarchy on the streets. But we should never have got to that point. It was entirely preventable: Canada never abolished it strict banking regulations, and its banks sailed through this crisis unharmed, without hoovering money from its tax-payers.
So you would expect that the urgent priority of our governments after the bailout would be to put the banks back into a cage of sober regulation. But it hasn't happened. Two years on, the paltry new regulations have been the equivalent of a heart attack survivor deciding to cut back from smoking sixty cigarettes a day to fifty. They are gambling with derivatives again. They are gambling with our deposits again. They are using our money to pay themselves record bonuses for record failure. Most economists believe the banks need to hold capital reserves of 30 percent to protect against another crash. The new rules say they have to hold 3 percent, by 2019, if you wouldn't mind awfully.
For the bankers, it's a dream deal. When they make profits from gambling in the good times, they pocket them. When they make losses in the bad times, you and I pick up the tab. The people we have been told for decades to worship as "wealth creators" turned out to be the biggest wealth-sucking parasites in history. The only part of the banking sector that isn't partying like it's 1999 is the only one we actually need: lending to ordinary people for mortgages and small businesses. We bailed them out, but they are refusing to bail us out.
It's clear where this story will end. The US Treasury Department's Inspector General, Neil Barofsky, reported to the Senate in January this year: "If we do nothing to correct the fundamental problems in our financial system [we will] end up in a similar or greater crisis in two, or five, or ten years' time. It is hard to see how any of the fundamental problems in the system have been addressed to date. [The bailouts] saved our financial system from driving off a cliff in 2008, [but] we are still driving on the same winding mountain road, but this time in a faster car."
Why would our governments allow this? Why would they disregard our interests so blatantly? They have, in effect, been hijacked by a small elite bribing or threatening them. No American politician can run for national office without taking money from these financiers, and they then have to dance with the men who took them to the Washington ball. British politicians suck up City donations too, and are terrified of bankers threatening to relocate. Simon Johnson, the former chief economist at the IMF, says "the finance industry has effectively captured our government."
But incredibly, Wall Street and the City are actually complaining that our politicians have already done too much to reregulate. After one senior Wall Street banker protested that Barack Obama was "beating us with a stick", the comedian John Stewart replied: "What you call a stick on Wall Street, I guess Americans call a trillion-dollar bailout of your industry. So a lot of Americans will be saying to Obama right now: 'Hit me with that fucking stick.'" In 1929, some of the bankers who caused the crash had the decency to kill themselves. This time, they've demanded bigger bonuses.
It is all going to happen again, unless there is hefty public anger and pressure to bring back the banking regulations that worked so well between the 1930s and the 1990s. We need to take our government back from the corrupt clutches of the City. If we go back to sleep, we will be mugged again, and next time it will be with a bigger knife and deeper stab wounds. You can, at least, bank on that.
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This article originally appeared in the British edition of GQ magazine. To get Johann's columns for them a month earlier than they appear online, subscribe to the magazine here.
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