Corruption in the banking sector

As I prance around Montréal and Québec trying to improve government services with open data, talks, activism and apps, I often get blank stares. Following the blank stares come the proclamations only slightly less direct than, “Government is a huge bureaucratic mess that spends like a drunken sailor and needs to be cut down to size.” While there are parts of this that are clearly true – government is often inefficient – people often fail to realize that government is not external to society. Government does not work in a vaccum, it is dependant on taxes (personal, property, corporate, other), people, civil society, and a vibrant economy. Importantly, access to capital and an ability to earn interest on assets is as important for government as it is for private companies.

Today, we are seeing dramatic austerity programs implemented in Spain, UK, Greece and other parts of the world. It is a social experiment on a global scale. On one side, we have the United States, Canada and Australia who are spending money and avoiding dramatic cuts and on the other side we have European countries making massive cuts. We will see the results, but it is interesting to understand the causes. In a global economy, money flows to places of security and banks are happy to accomodate both the wealthy fleeing failing countries and the governments desperately requiring capital to mask their faltering finances.

It is becoming clearer and clearer that the banks played a nefarious role in the evolving crisis. More than money changers, they actively entrapped governments and short changed them on their returns. We now know Goldman Sachs lent massive amounts of money to Greece in complex packages with restrictive terms few mortals could comprehend, a behaviour not dissimilar from a loan shark. In the same manner a drug dealer makes his clients dependant on them, Goldman Sachs made Greece dependent on their loans. Concurrently, banks around the world were rigging interest rates on municipal bonds and capital, reducing revenues to governments and further pushing them into dependency.

The magnitude of the scandal is just starting to emerge into sight, LIBOR being the biggest baking scandal ever. The evolving LIBOR (infographic) scandal affects 800 Trillion dollars (not a typo) of debt and securities and the municipal bond fixing scheme in the United States harmed thousands of towns. I encourage you to read the Rolling Stone piece on interest rate bidding by banks for management of municipalities’ capital, but basically both scandals are price fixing on a massive scale (see Bill Moyer’s show). These tactics of price fixing undermine the integrity of the system and lay bare the hypocrisy of solely blaming governments for budget shortfalls and overspending.

Fixing these problems and ensuring good governance by national and municipal governments requires diligent and talented people. Getting talented people into public service is harder than ever. Our society’s culture, since perhaps the 1980s, values private sector work over public work. Consequently, the best and brightest minds go into the private sector. This leads to further erosion of government services as mediocrity permeates government services, pushing yet more talented members of society into the private sector. And on and on until we hit a wall, we might be there.

Long story short, let us not be so quick to judge, sentence, and execute government for gross incompetence; the entire system is at fault and it will take a lot of hard work to fix it.

P.S., this is whole situation is similar to the run-up of the french revolution.

Published on July 14, 2012