Robert Peston writes an interesting and provocative piece on his blog about the proposed Basel rule changes but rather misses the bigger picture. Yes, the banks have behaved appalling. Yes, Basel is a joke. Yes, the bankers and the politicians went to Oxbridge together. However, there is one fundamental problem with banking reform, and from outside the traditional powerhouses of the global economy it is clear to see: the financial system is rigged to favour the Old World economies.
As the West has generated a smaller and smaller proportion of the global economy’s trade and value, and China and other emerging economies have generated more and more, we should have become relatively poorer and the Chinese et al. should have become richer. We all benefit from increased trade but the emerging economies should benefit most.
Now, this has happened, but despite the fact that manufacturing has moved to the East, the West has remained richer than might have been expected. The West has achieved this by keeping control of the world’s financial system, and increasing the gearing and velocity of money in that system, so that it takes more of a cut of money passing through, and does it more often. The result is an unstable mess. But this rigged system keeps the West richer than it should be, as it siphons wealth and ever increasing amount of cash from across the globe, to pay pensions, finance trade and fiscal deficits, as well as keeping bankers richer than Croesus.
The West will not voluntarily reform a banking system that benefits it so much if the consequence is a diminution of its global authority and increased poverty at home. Reform will come not from Basel but from China and the other developing economies, which are now generating and accumulating the type of wealth which will enable them to challenge the rigged system. It is for this that policy makers should be preparing.
Already China is accumulating very significant bullion reserves and reducing its reliance on the dollar as a reserve currency. This is the first stage in the renminbi becoming a challenger to the dollar as a reserve currency and it is already quite clearly happening, even though most westerners cannot even name the Chinese currency. This removal of reliance on the US dollar will pave the way for Chinese financial institutions to challenge the US and European finance houses. Once this happens the West’s ability to rig the system will be undermined and its ability to fund trading and government deficits will be undermined.
Reform of the system is one thing – but be careful what you wish for. Unless you’re Chinese.