Seeing policymakers promoting trade in dodgy financial products linked to mortgage loans again, only eight years after these practices were the direct cause of the biggest financial crisis since the 1930s, feels like a bad dream. However, technically analysing what is wrong with this proposal is not enough. Changing the agenda without mobilizing society will not do the job. We have to learn from the mistakes of the reform era that followed the crisis of 2008 if we want to halt a new era of deregulation.
This expert opinion was written in response to our research article on the European Capital Markets Union: Europe and the financial sector: a continuing love affair.
The political project to erect a Capital Markets Union (CMU) could be the dawn of a new era of financial sector policy making in Europe. The former reform era started after the financial crash of 2008, but only lasted a few years. It was a fight between political forces that wanted to regulate the financial sector in a thorough way and lobbyists for the financial sector.While the financial sector understood it could not completely avoid new rules, it engaged in a bitter fight to keep its crisis business models alive by toning down proposals and successfully advocating for exceptions to keep its manoeuvring space as large as possible.
Dawn of a new era of (re)deregulation
The CMU is different, because the industry is no longer on the defence. Only eight years after the crisis hit our economies, some of the few gains made are under attack. We are witnessing the potential dawn of a new era of (re)deregulation if the CMU is adopted. It is important to understand that what is being attacked with the attempt to bring back the repackaging and on selling of mortgage loans on the market, is a mostly invisible gain made in the aftermath of the crisis, namely: higher capital requirements for securitization, which made the practice uninteresting for banks.
This is why I want to question in a very specific way the assertion made in the article that “the effectiveness of the reforms proposed by the Commission is broadly questioned”. I am convinced that most people, if they were aware of the proposal, would not believe that reanimating the financial mechanism that wrecked state coffers around the world is a sound way of stimulating the economy. But there does not seem to be a broad awareness that these proposals are on the table and that elected heads of state will decide whether or not they want to support them. The reform debate of the last era suffered from its technicality, as it took the existing complexity of the sector as the starting point and not the political question of which functions a bank should perform. As a consequence the debate over what regulation to adopt was too technical to allow broad campaigning and to mobilize civil society.
Combating the CMU requires more than financial experts
It is a good thing there are critical experts, such as the ones who recently voiced concern about the CMU in an open letter, but to create obstacles for the crusaders of this new deregulation era we need to go further. The proponents of deregulation can only prevail by living in the dark. We should adopt the ‘Dracula’ strategy, advocated by Susan George to combat the Transatlantic Trade and Investment Partnership (TTIP): “expose the vampire to the light of day and he will shrivel and die”. This implies looking for the elements of the CMU that are most vulnerable to public opinion – which may require engaging more communication experts than financial ones. A better strategy is also needed for mobilizing civil society and the public on finance, which requires fresh ideas to break down the wall between the finance sector and everyday people. People still prefer to criticize bankers then to call their bluff and engage them in a fight on regulation. Who would have thought that three years ago the TTIP would receive this much opposition?
Finally we should reject the moralizing injunctions we receive to invest and take on risk to stimulate the economy. Collecting savings and managing risks while financing the economy is the primary role of banks, not of savers. Nevertheless, the political dilemma of the stagnating European economy is real and we should ask ourselves openly what kind of economy we want to stimulate and what role finance should play in this.