Capitalism is at risk of destroying itself unless bankers realize they have an obligation to create a fairer society, Bank of England (BOE) Governor Mark Carney has warned.
Carney said bankers had operated a “heads-I-win-tails-you-lose” system and questioned whether traders met ethical standards, adding that those who failed to meet stringent professional criteria should face ostracism.
Speaking at a conference in the City of London, Carney warned that there was a growing sense that the basic social contract at the heart of capitalism was breaking down amid rising inequality.
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“We simply cannot take the capitalist system, which produces such plenty and so many solutions, for granted. Prosperity requires not just investment in economic capital, but investment in social capital,” he said.
In a strongly worded critique of City behavior in the runup to the financial crisis, Carney said market radicalism and light-touch regulation had eroded fair capitalism, while scandals such as the rigging of LIBOR markets had undermined trust in the financial system.
“Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself. To counteract this tendency, individuals and their firms must have a sense of their responsibilities for the broader system,” the UK bank’s governor said.
Carney told delegates at the Inclusive Capitalism Conference held in the City’s Mansion House and attended by former US president Bill Clinton that big banks typically operated in a “heads-I-win-tails-you-lose bubble,” with personal gain hotly pursued by bankers.
“All ideologies are prone to extremes. Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith. In the decades prior to the crisis, such radicalism came to dominate economic ideas and became a pattern of social behavior,” he said.
The central banker added that UK and international policymakers and regulators were addressing ways of making the system fairer and of limiting the likelihood of a future financial crisis through reforms, but stressed that there was a greater onus on banks and bankers to take responsibility.
Referring to changes afoot after the scandals in fixed income, currency and commodity markets, Carney said: “Such changes are vital, but they cannot anticipate every contingency or discipline every miscreant. The scandals highlight a malaise in corners of finance that must be remedied. Many banks have rightly developed codes of ethics or business principles, but have all their traders absorbed their meaning?
“Consideration should be given to developing principles of fair markets, codes of conduct for specific markets and even regulatory obligations within this framework. There should be clear consequences, including professional ostracism for failing to meet these standards,” he added.
Carney said that G20 leaders and international regulators on the Financial Stability Board were working to resolve the issue of financial institutions that were “too big to fail,” a problem which left taxpayers with a huge bill.
“Perhaps the most severe blow to public trust was the revelation that there were scores of too-big-to-fail institutions operating at the heart of finance. Bankers made enormous sums in the runup to the crisis and were often well compensated after it hit. In turn, taxpayers picked up the tab for their failures,” Carney said.
He said that one of the lessons of the financial crisis was that compensation schemes that delivered large bonuses for short-term returns encouraged individuals to take on too much long-term risk.
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