Actually 1930s solutions stopped financial crises for decades and would work now

Mervyn King, the Governor of the Bank of England had the temerity to suggest that banks be broken up into retail banks and investment banks, thus reducing risk and making them smaller so they aren’t “too big to fail”.

Today the Labor government shot back that such a solution is a 1930s solution, but these days it wouldn’t work. The conservatives suggested that they would only follow King’s suggestion if every other country did too. Which is to say, they wouldn’t.

There’s a strange idea in Britain that the financial sector, which is to say “the City”, represents a comparative advantage for them. This idea mirrors the American belief. Both countries are wrong. What has happened instead is that over-sized fraudulent leveraged returns in the financial sector have driven out investment in the real economy. And since those returns were and are fraudulent, when the collapse came the real economy, aka: taxpayers, had to bail them out.

Over-sized, over-powerful financial sectors are parasitical on the real economy, and actually damage it. This is a clear lesson historically, where economic financialization of any country larger than a city state is almost inevitably disastrous.

What is occurring right now in England is a huge amount of slashing of basic services, as both Labor and Conservatives compete to cut, cut, cut. Huge amounts were spent on bailing out the banks, and now it will be paid for by ordinary people. This is a direct transfer of wealth from the real economy, to the financial economy.

England would be better off with a much smaller, weaker financial sector composed of banks small enough to be allowed to fail. If the possibility of them being taken over is Brown’s real fear (and it may well be) then simply create some ownership restrictions to keep them in British hands.

Splitting banks into retail and investment banks, keeping brokerages and insurance companies separate as well is part of a solution set which kept major financial crises like the recent one from happening for most of the second half of the 20th century. It was put in place by people who were experiencing the Great Depression and had learned the lessons of the roaring 20s.

The inability of our decision makers, whether British, American, Canadian or otherwise to understand those lessons and take action is why it is inevitable at this point that we will have an economic collapse. It is, at this point, all but inevitable, not because nothing could be done to stop it, but because no one will do what it takes.

Such a collapse may be as far as two economic cycles out, or it may be sooner, but it will happen. And the sort of non-argument made by Brown “not a 21st century solution”, which is content empty, is why. The real reason is cupidity. Both the British and American governments are completely captured by monied interests and will do nothing significant to reign in those interests, no matter what the costs or consequences for the majority of the population.

And so those consequences will ensure. By not making another financial crisis impossible, they are making another financial crisis inevitable, and next time it will be even worse.