The Bank that Broke Britain

Book review by T. Shanks

Shredded: Inside RBS, the Bank that Broke Britain, by journalist Ian Fraser, is the story of the rise, collapse and bailout of the Royal Bank of Scotland (RBS), at one time one of the world’s largest banks. While this narrative is the main focus of the book, it is about so much more.

Many books have been written about the financial crisis of 2007, including the collapse of the Lehman Brothers, but they have almost exclusively described the crisis from an American perspective. Shredded takes an inside look at the crisis from the perspective of a British bank, and it is likely the definitive work in this regard.

Fraser’s work is much more than a description of the crimes, corruption, mismanagement and selfishness of the management team in a single bank, as it also illustrates how the mind-set and priorities shown by the RBS bosses is representative of the thinking inside large portions of the financial sector.

Praise for the book has been effusive. Martin Wolf of Financial Times wrote, “A gripping account …RBS was a rogue business, operating in what had become a rogue industry, with the connivance of the government. Read it and weep.” Max Keiser calls it “An instant classic,” and Yves Smith, author of Naked Capitalism, calls it “The definitive account for the RBS fiasco. It’s an engaging tale of how self-serving bank executives systematically broke the rules, lent with astonishing recklessness, abused customers and got suckered by Wall Street – before dumping their mess on the taxpayers.”

In this well-researched book, Fraser describes how the RBS, a bank that exemplifies a whole financial sector, had gone awry. Over the years, RBS was taken over by executives driven by equal portions of personal greed for perks and bonuses and an ego to lead RBS to become the biggest and most profitable bank in the world. In their relentless quest for expansion, the management bought up other banks at overvalued prices heedless of whether the deals made financial sense or not. If the deals went through, they paid themselves huge bonuses, and if they later turned out to be bad deals, the shareholders would pick up the tab.

Billions of pounds were paid out in bonuses every year, and it seems that all activity was geared to maximise these at all cost. Bonuses were paid on unrealised profits, and due to flawed risk assessments, huge profits, with the accompanied bonuses, were booked on transactions that turned out to generate losses. This perverse culture encouraged reckless risk taking and total disregard for the interest of the bank, its customers, or society as a whole.

In general, banks make profits on fees and interest they charge their customers. RBS, however, went even further. The bank actively tried to put some of their customers out of business so that it could grab the underlying assets used as security for their loans. This is probably a new low, even for the notoriously greedy banking sector. RBS is currently fending off a number of lawsuits related to this behaviour.

Even though the actions of the bank were horrendous, the most frightening image the reader is left with is that the malpractices seems to have continued unabated after UK taxpayers bailed out the bank with an astonishing GBP 54 billion, close to 5% of the British GDP. In spite of the UK government now owning over 70% of the bank, the culture of exorbitant bonuses, running into billions of pounds annually, continued, even as the bank was losing money. Other malpractices, such as the rigging of interest rates, continued as well. And customers were still treated shabbily. Even though Derek Carlyle won a Supreme Court judgement against RBS in 2015 for trying to financially destroy him, it took three years before the bank agreed to compensate him. Throughout, the bank continuously refused to take responsibility for its bad behaviour.

This raises an important point. If the taxpayers now are the owners of the bank, one would assume that the culture would change and that a new moral compass would lead the bank’s decision making process. But this never happened.

Presently the UK government is in the process of selling its shares of the bank at a price far lower than what they bought it for. In June 2018 it sold the first chunk of 7.7% of the shares in RBS for GBP 2.5 billion, taking a loss of GBP 2 billion in the process. It is anybody’s guess how big the losses will be once the government has sold all its shares.

Ian Faser does not provide a wider analysis of the financial sector, nor does he ask questions about its role within the broader economy. This is both a strength and a weakness. By sticking to the abuses of RBS and other rogue institutions the book becomes less controversial and will probably reach a larger readership. But given the magnitude of the financial crisis, and the intransigence of present day financial institutions, there are many broader issues that needs to be brought into the light of day.

One of the questions not raised in the book is how and why a person like Fred Goodwin—or “Fred the Shred” as he was nicknamed, due to his cost savings methods–became the CEO of RBS. The short answer: he fit the bill of the financial culture of greed at the time. Mr. Goodwin’s abrasive nature and poor human relationship skills were well known inside the bank. Mr. Goodwin also had a reputation for aggressive cost saving schemes, including cutting 18,000 jobs during the merger between RBS with NatWest, while at the same time pursuing acquisitions and mergers. In short, there was nothing hidden in his agenda, and everyone knew before his appointment what type of a leader he was. Therefore, the problem was not just Fred Goodwin, but rather the new culture of profitmaking gone wild. Thus the shareholders handed over the running of the bank to “Fred the Shred” quite readily.

Another question that is unanswered is the role of banks in a broader sense. Banking is supposed to provide a supporting function so that the real economy can work more efficiently, but the financial sector has now grown so big that it dominates all other sectors of the economy. Instead of serving the real economy, it has now become its master. And a cruel master to boot.

In 2012, 40% of all corporate profits in the US came from the financial sector. However, as Professor Michael Hudson points out in his book The Bubble and Beyond, the financial sector does not produce any wealth. That means that the 40% share of these corporate profits did not add to the income of the US economy, but simply reduced the profitability of the companies in the real economy by the same amount. Another way of putting it is that the financial sector acts like a parasite that sucks off large portions of the wealth created by the real economy. In effect, the financial sector strangles the real economy. If the money had instead been kept in the real economy, it could have been used to increase wages, been invested in productive ventures, or used in other ways to increase the wealth of society as a whole.

But there is a new twist to this story. While the banks have become parasites living off the real economy, the executives have become parasites living off the banks. There are still honest bankers with integrity around, of course, but too many of them are running a scam, similar to the way “Fred the Shred” was allowed to run RBS. Bankers like him take enormous long term risks showing huge profits in the short term, because no provisions are taken for the eventuality that their gambles will fail. Based on this, they are paid huge bonuses. When the bubble bursts, they resign, get to keep their past bonuses, and to top it off, they retire with an outlandish pension. The shareholders and the taxpayers are left behind to pay the bills.

Human society is a society based on laws. Today we have created laws that allow the financial sector, and in particular the executives who run the banks and other financial institutions, to legally steal from the rest of society. Unless this is recognized, and changed, we will continue to see more, and even worse, financial crises in the near future. And we, the taxpayers, will continue to bail out more people the likes of “Fred the Shred.”

The Bank that Broke Britain
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It’s Time to Grow a New Economy

In the new book Growing a New Economy: Beyond Crisis Capitalism and Environmental Destruction authors Roar Bjonnes and Caroline Hargreaves present a compelling case for the current predicament humanity is facing: the environmental crisis, the authors claim, cannot be fixed until we also fix our economic crisis.

Endorsed by world renowned environmentalist Bill McKibben, author of Deep Economy, the book presents comprehensive solutions to the interwoven crises of our times: the debt, inequality, resource and environmental crises. A seemingly daunting task, but the authors pull it off remarkably well. They do so by critically analysing each issue, then by coming up with both short and long term solutions.

As McKibben points out in his own book, the rapid increase in local green businesses and organic farmers markets in the industrial world is a laudable phenomenon, perhaps even a sign that a more sustainable economy is emerging. Likewise, Growing a New Economy is also a hopeful book, but it ploughs much deeper, and it certainly turns over more enriching soil than the standard book on sustainable economics.

Futurist Sohail Inayatullah writes that the book not only “challenges neo-liberal thinking, but also socialist and even green narratives, creating a new discourse for a post-capitalist future.” In addition, it takes a historical look at capitalism itself, and shows, in great detail, how our economy and the market that sustains it, has fundamental flaws. It also goes through our economy’s main problem areas. But it’s not all doom and gloom. According to McKibben, the book is a “hopeful account of the possibilities contained in our current crisis.”

In a layman’s language, the authors analyse the complex history of our market system, the origins of the European Union, with an emphasis on the last economic crisis, and they also take a critical look at the bedrock of modern capitalism and the neoclassical economic theory it is built upon. They also describe the many pitfalls of green capitalism—how and why today’s versions of sustainable economics are not always as green or as deep as they sound.

In the first part of the book the authors, both from Norway, characterizes four distinct planetary problems they predict are now coming together in a perfect storm. The first is the economic crisis of 2007. And if you think this devastating crisis is already over, think again. The superficial efforts to save the world from a complete economic meltdown has simply left the financial system even more vulnerable. The worst is yet to come.

In the next chapter, on the inequality crisis, they draw heavily on the work of French economist Thomas Piketty, who has shown that extreme inequality is not only growing but is also “useless” and “harmful” as well as a fundamental threat to our democratic institutions.

“All human beings deserve to have a decent living standard,” they write, “but when resources are poorly allocated, the few take an ever-increasing share of the world’s wealth.” While there has been progress in bringing millions of people out of poverty, inequality in rich countries, and in the world as a whole, is increasing at an unprecedented rate, and if not checked, it could destabilise the entire free market. After all, in order to have a functioning free market, the book argues, the people on Main Street and in the world’s villages need enough purchasing capacity to buy what is essential to lead a good life.

The resource crisis is the third crisis described in the book. The authors paint a vivid picture of how non-renewable resources are being destroyed at an alarming rate because “they have been taken for granted, or if scarce, it has been assumed the market will find a ready alternative to replace them.” But as we know, that is generally not the case. Indeed, we have, according to many scientists, reached a state of “overshoot” and if we do not alter course, the global eco-system, which our economy is an integral subsection of, is predicted to collapse somewhere in the middle of this century. In other words, we are facing an environmental crisis of unprecedented proportions: we are in fact in the process of destroying the capacity of nature to support life itself.

In the section on the environmental crisis, the book describes six of the most serious threats facing our planet today. With clear and logical facts, it lays out the bare bones reality we are up against. If we do not face these problems head on and safeguard a sustainable environment, there will simply be no sustainable economy. Therefore, it is time to change course so that we can start “creating a more sustainable, ecological and resilient economy.”

The second part of the book deals with the history of economic thought. Here we are introduced to the main economic thinkers throughout history, from Adam Smith to Karl Marx, from John Maynard Keynes to Joseph Stieglitz, from Karl Polanyi to E. F Schumacher. Here they paint a fascinating story of how the various economic ideas have clashed over time and how classical economists like Adam Smith, the very father of modern economics, would probably turn in his grave if he knew how far away capitalism has evolved from his own ideas.

This part of the book also looks at how the European Union was created, and analyses the “Four Freedoms” that lays the foundation of the EU’s constitution as well as its troubled economic and political system. A situation which the authors think is predictable and can only be solved if the entire union is reorganized along a con-federate system of more localized political and economic regions.

The third part critiques the very foundation of the capitalist system, namely free markets and neoclassical economic theory. This part, which may be a bit heavy on theory for some will nevertheless be highly rewarding for those who’ll take the time to go through its detailed analysis of the flawed “mathematics” and “science” of modern economics.

It is in the fourth part of the book, “Economic Solutions for People and Planet,” however, where the authors “put on their visionary glasses to look into the future of economics.” And what a future it is. In the section on resolving the financial crisis, they first ask the question many of us have pondered and been frustrated about: why should the people on Main Street be responsible for the crisis created by those on Wall Street? But they do not stop by asking questions, they proceed by introducing alternative solutions, including progressive wealth and income taxes, steps to reduce monopoly profits, and creative ways to overhaul the banking system.

But that’s not all. They also give suggestions on how to overhaul the financial sector, which has “grown out of proportion to the real economy” and thus changed from a “necessary tool to a destructive weapon.” These changes include the banning of naked short selling to preventing foreign exchange purchases for speculation. And then from there they tackle new reforms in free trade, patents and capital movements. In simple and clear terms, the authors create the case for how to reduce speculation and how instead to stimulate the real economy.

The important process of making poor countries rich and prosperous is also discussed. Here we learn that many of the policies that are now imposed on poorer countries are exactly opposite to those that rich countries used to become rich themselves. In addition, economic inequality within nations is also addressed, with a far reaching proposal to introduce a deeper economic system they term “economic democracy.”

In the final part of the book, we learn that the previous policies are transitional, and that more permanent economic policies are needed to create a new economic system. It is here that we are introduced to an entirely new economic theory, the Progressive Utilization Theory (PROUT), which incorporate both capitalist and socialist ideas while going beyond both these traditional systems of economics.

According to PROUT economics, capitalism functions best on a small scale and becomes dangerous once corporatized and monopolized. These corporations must therefore gradually be turned into worker-owned coops. In place of the old market system controlled by corporate giants, a new, regulated market economy will be guided by a benevolent government structure that will lay the rules for integrating society, the economy and the environment in a new system that transcends the old left-right political spectrum of ideas.

Growing a New Economy is a landmark book. Thought provoking, rich in content, deep-ploughing in its analysis, while at the same time presenting new and remarkably sound alternative solutions to our current crisis in economics.

It’s Time to Grow a New Economy
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