The recent Barclays Bank scandal in Britain, which has revealed systematic manipulation of interest rates and other deceitful practices, represents only the tip of a huge iceberg of market manipulation and other forms of malpractice taking place in Britain and America's largest banks. They have used what Nobel Laureate economist Joseph Stiglitz calls "asymmetric information" to game the financial system for personal profit rather than performing their supposed role of increasing productivity and wealth. In the process, they have brought about the near collapse of the global economic system and created income and wealth inequality not seen in a couple of generations. Stiglitz documents the damage done in his latest book, The Price of Inequality: How Today's Divided Society Endangers Our Future.
The behavior of the largest banks is not only rapacious and destructive to the social fabric, it is also stunts economic growth. They are not investing the huge resources they have accumulated in ways that would stimulate the economy but instead are engaged in what Stiglitz calls "rent seeking" which does not increase national productivity or wealth but simply appropriates resources from other people by fair means or foul.
How did this come about? First of all, the self-serving promotion of "free market fundamentalism" by the wealthy, corporate interests, and complicit politicians over the past three decades allowed America's largest banks to swallow up thousands of smaller community banks. In the process, they have replaced the idea that the main function of banks is to serve their local communities with one that explicitly states that their primary obligation is to their stockholders.
While gaining control of a larger and larger percentage of the country's economic activity, these banks successfully fought any government oversight of their activities through the efforts of armies of lobbyists and enormous campaign contributions to members of Congress on both sides of the aisle. As a consequence, as Stiglitz says in a July 7 interview by Ben Chu in the British newspaper the Independent:
The banks and others have engaged in rent seeking, creating inequality, ripping off other people, and none of them have gone to jail. None of them have been prosecuted individually. Banks are people. The irony is that in most of the cases, if you look at what happened, the bank pays a fine. Who pays the fine? It's the shareholders. But the shareholders have usually been ripped off as well by the managers. So the managers sit there exploiting not only the borrowers but also the shareholders. ... So we have a system of very weak accountability and no individual accountability.
So what can be done about this disgraceful state of affairs? Very little, apparently, under current law. Only New York State has legislation -- the Martin Act -- that comes close to holding individuals accountable for market manipulation and the ability of that State's authorities to go after banks headquartered elsewhere is severely limited, even if they were eager to do so.
Needless to say, the prospect of seeing Federal legislation dealing with these abuses during the current term is nonexistent, given the banks' virtual ownership of Congress. Unfortunately, there is a greater risk of matters getting worse rather than better. Imagine what will happen if we have a Romney Administration and anything close to the current make-up of Congress. We will have free market fundamentalism on steroids and no possibility of curbing the bankers' greed, let alone breaking up the biggest and holding their managers accountable for their predatory behavior. One or more Romney pro-business appointees to the Supreme Court would compound the problem.
Would an Obama second term and more Democrats in Congress bring other results? Who can tell? But the stakes are too high not to take our chances with that option. In the first place, we need a Supreme Court appointment that would result in overturning the Citizens United decision. Beyond that, the bully pulpit of a lame-duck President, combined with public outrage at the bankers, might just be sufficient to stiffen the spines of enough members of Congress that they would take the steps needed to get the country back on the right track. The President is reported to have told the heads of the major banks right after the 2008 debacle that he was the only thing standing between them and the pitchforks. Assuming he wins re-election, I hope he steps aside and urges the folks with the pitchforks to have their way with the Frankensteins of finance for the monstrous creations they inflicted on America and the rest of the world.