Adam Smith’s ‘agency problem’, the separation of ownership from control, enables big-business executives and directors to pursue their own agenda. All too often this results in an unholy alliance between big business and big government, the former achieving protection from competition via state decrees or regulations, and the latter gaining its prized goal of greater power and intervention, along with a ready-made scapegoat (‘the market’) when things go wrong.
The modern term for this collusion is corporatism and perhaps the most obvious corporatist industry is banking. Banks need government licences; they cannot issue their own bank notes (they must use those of the central bank); they are prisoners of interest rates set by the central bank and central government; they make billions of pounds directly from governments – raising capital for them, trading their ‘securities’ and advising them.
On top of all that, and deposits guaranteed by government, banks need hold no reserves of the money in which they deal; nor need they hold much in the way of capital. And they are guaranteed not to fail – as we have seen with Northern Rock, which is to carry on as usual under government ownership when even its former shareholders are seeking compensation from the taxpayer. Yet with a mere handful of exceptions, journalists berate banking as greedy capitalism, or even market fundamentalism!
Terry Arthur is the author of Crap: A Guide to Politics.