A return to responsible banking?

The big moves afoot to bail-out the UK banking system are gathering pace, and so are the signs that the rest of the world’s Governments may well follow Gordon Brown’s lead in one form or another.
After a week from hell on the Stock Markets, this could be the week when the almost vertical plunges of share prices will finally be arrested. Either because they’ll have hit rock-bottom, because the worldwide efforts to shore-up the global financial system restore some kind of confidence, or because - in the worst-case scenario – chaotic Stock Markets are temporarily shut down.
So what comes next? Beyond snail’s pace economic growth that could easily last for a couple of years, we come on to what I suspect is Part II of Gordon Brown’s Grand Masterplan for the future of the UK economy.
You can’t make major changes to a banking system without there being consequences. And I don’t think it was ever the Prime Minister’s intention to apply the most expensive sticking plaster in history and watch the banking industry simply run off into the distance and play games again.
No, the emerging theme – and watch out for a reoccurring political slogan – will be a return to responsible banking.
But what does this actually mean?
When things go wrong, you'll often see a well-worn phrase trotted out: ‘It wasn’t like this 30 years ago’. Close examination usually reveals that while it may have been different it wasn’t necessarily any better.
The same is true of the financial system. While there’s little doubt that lending (and borrowing) had got out of control in recent years, the slow-paced financial system we had in the 1970s and early 1980s did little to accelerate economic growth, with inefficient banks and building societies taking a painfully conservative approach to the way they handled personal and commercial finance.
This is a crucial point: the idea that we should simply un-invent every single one of the financial services innovations that have allowed our economy to grow would be a huge mistake – one almost certain to prolong recession, according to some economists.
Think of it this way: look at the Nottingham commercial landscape – all the businesses and buildings that make it up – and remove some significant chunks. Without financial competition and innovation you would have had empty, undeveloped land, a weaker economy, fewer jobs, poorer people.
Nevertheless, some parts of that landscape owe their existence only to the fact that someone was willing to put money into building them – not because there was any demand from Joe Public.
This is where that Return to Responsible Banking comes in. Many of those City Living apartment blocks on the Nottingham skyline are metaphors for lending that spiralled out of control and out of sight.
In the eyes of critics, they represent an era when the banks appeared to lose sight of their core function – enabling sustainable personal and commercial spending – and became obsessed with selling you money. You had ceased to be a customer in the traditional sense (one to whom banks provided a service) and were instead seen as a sales opportunity.
This commercial imperative culminated in a destructive scenario where it was entirely logical for banks to encourage people to get into debt because they made fees from credit and sold the risk on to someone else.
It has been like some giddying laboratory experiment that ended not in a new scientific discovery but a nuclear detonation.
Like I say, you can’t un-invent history. But you can learn from it. The challenge for Gordon Brown and the financial services industry is to rebuild the model in a way that encourages the use of credit to enable sustainable growth.
You will never eliminate risk, you will never eliminate greed. But you can point out the consequences.
If the kids going through Nottingham’s schools right now are to enjoy a prosperous, sustainable future then teaching them about the Great Crash of 2008 could be the most valuable lesson they learn.