David Moscrop is a writer and political commentator. He is the author of Too Dumb for Democracy and a new Substack newsletter.
As a part of the capitalist market, the banking industry will tell you it operates under the same principle of the free market as any enterprise: Actions have consequences. If the 2008 financial crisis, bailouts and the term “too big to fail” taught us anything, however, it’s that “consequences” are malleable – and avoidable. Now, as domestic and global banking systems stare down bank failures in Silicon Valley and Switzerland, observers are left to ask whether there might be more appropriate, and actual, consequences for bankers when their banks fail.
In mid-March, U.S. President Joe Biden was forced to reassure the nation that the banking system was safe and stable after the second-largest bank failure in the country’s history took down tech lender Silicon Valley Bank and two other lenders failed. The Biden administration, to its credit, said there would be no “bailout” and “no losses will be borne by the taxpayers.”
But the Federal Deposit Insurance Corp. covered deposits only up to US$250,000 – and 90 per cent of the Silicon Valley Bank’s deposits were over the insured maximum. The federal government had swooped in to guarantee all the uninsured deposits. Even if the Biden administration’s move saved only depositors and not shareholders, a cynic might say it was a bailout in all but name for a bank that fell because of its own recklessness.
Meanwhile, in Switzerland, global banking giant Credit Suisse began to collapse later in March – a collapse a long time coming – requiring support from the Swiss state and, ultimately, purchase by its rival UBS in a move backed by the government.
Swiss Finance Minister Karin Keller-Sutter drew on the 2008 global financial meltdown to justify management of the Credit Suisse fiasco. “Personally I have come to the conclusion … that a globally active, systemically important bank cannot simply be wound up,” Ms. Keller-Sutter said. She also noted it “was clearly not the moment for experiments. The crash of Credit Suisse would have dragged other banks into the abyss.”
There is some truth to that. The alternative to bailouts can perhaps be an even greater disaster. But it is also clear that we haven’t learned as much as we’ve hoped from 2008 and, naturally, there will never be a moment for “experiments.”
There may be some consequences for the bank’s managers, to be sure, as the Swiss financial regulator considers taking action against them. Mr. Biden has mused the same for bankers in the United States. Obviously, they should open proceedings. That it’s even a question, however, is a reminder that bankers around the world, particularly the big ones, play by a different set of rules.
If 2008 taught us anything, it’s that if you steal a loaf of bread, you may face a judge and be thrown in jail. But if you take part in tanking the global financial system, resulting in ordinary folks literally and metaphorically needing to steal bread to survive, you’ll walk – not just be out on bail but rewarded with a bailout.
It’s well beyond time to consider more sticks and fewer carrots for bankers whose mismanagement and misdeeds produce externalities that ruin the lives of their clients, shareholders and everyone harmed collaterally by their failures. Punishment must be part of the answer, if we are to live in justice regimes where citizens are subject to punishment.
In 2008, Iceland jailed its bankers for their part in the crash, with hundreds investigated and dozens tried and sentenced. In 2017, the country’s prime minister suggested Britain should have done the same. Even if the current situation isn’t 2008 come again and criminal charges are not warranted, at the very least, those who were a part of these failures ought to be barred from ever working anywhere near the financial sector again. Mr. Biden has pondered along these lines. It’s a good start.
Those who oppose, or at least question, such punishments might ask to what end they would be undertaken. Iceland says it has been part of the post-2008 healing process. The answer is a mix of deterrence and rehabilitation. Angry people harmed by banker mismanagement and misdeeds might call it plain, old-fashioned justice – or consequences.
At the very least, the issue is a test of one’s moral compass and of the state’s commitment to treating all its citizens and residents equally, the bedrock principle of democracy. As history, and the present, teaches us: These are tests that are sure to be failed. But they don’t have to be.