Sam Mendes’s 1917 is the talk of Oscar season – but when I went to see it I was prepared to be disappointed. My fears had nothing to do with the film’s cast or crew. The trouble is that the subject matter is hardly virgin territory. Make a film about the First World War and you are pitting yourself against Renoir and Kubrick, to say nothing of Blunden, Sassoon, Jünger and Remarque – and that’s before you even get to the poets. It is a high bar for any new artistic treatment.
I have to confess that I had a similar sense of trepidation when I began Anastasia Nesvetailova and Ronen Palan’s Sabotage. As its title suggests, this is a book about what is wrong with finance and how to reform it. Moreover, much of the evidence it adduces to answer these questions consists of case studies from the financial crisis of 2007-09.
As Sabotage itself concedes early on, these are topics that by now been picked over in minute detail in a decade’s worth of articles, books, plays and films. Here, too, the bar for yet another effort is set high. What new contribution, I wondered, can Sabotage possibly make to set itself apart?
I was being dumb: the clue is in the title. Previous attempts to understand the financial crisis have tended to pin the blame on either global macroeconomic developments or esoteric failures of regulation. Nesvetailova and Palan have a simpler explanation: that there is something structurally wrong with finance as an economic activity, such that the only way its practitioners can really turn a profit is by habitually defrauding their customers, destroying their competitors and capturing their governments – in short, by sabotage.
The rationale for this rather depressing analysis can be simply stated: it is that finance is no different from any other business in a capitalist economy. Taking their inspiration from the great early-20th-century American economist Thorstein Veblen, Nesvetailova and Palan argue that all capitalist businesses face the dilemma that in a perfectly competitive market, profits are driven down to zero. The only way to escape this fate is for businesses to try at every turn to make the market less competitive; through “innovation, obstruction, undercutting, impairing, damaging, vandalising and cheating – generally within the letter but not the spirit of the law, and sometimes beyond the limits of the law altogether.”
This paradox at the heart of the capitalist system – the more competitive the industry, the more individual businesses will be compelled to resort to uncompetitive practices in order to salvage their profitability – is particularly pronounced, the authors argue, in finance. The reason is less that finance is an unusually competitive industry, than that it affords uniquely broad opportunities for the sabotage described above. The “products” of finance are ultimately just ideas, contracts and digital data. Competition-wrecking innovation and client-baffling shenanigans therefore require remarkably little capital or labour expense.
Nesvetailova and Palan are not short of examples. In the boom years, the authors explain, one wheeze among RBS account managers was to upgrade the accounts of newly deceased customers before filing their death certificates, in order to notch up bonuses. When the crisis came, the rest of Wall Street ganged up on the investment bank Bear Stearns and drove it into insolvency, in Godfather-like retribution for having broken ranks in another crisis a decade earlier. Today, the sabotage wreaked on governments by the latest craze in financial innovation, cryptocurrency, is summed up by a single quotation from one of its leading proponents: “Nobody in that space pays taxes.”
Sabotage’s insistence that these sorts of anti-competitive behaviour were the root cause of the crisis of 2007-09 and, more generally, lie behind the exceptional pro-fitability and persistent failings of finance is certainly distinctive. But how convincing is it – and does it lead to new and more effective recommendations for how to improve things?
In this regard Sabotage’s main strength is also, unfortunately, its principal weakness. It is true that in many ways, finance is just like any other industry. The book’s focus on anti-competitive behaviour is therefore fresh and well-justified, and leads to a welcome emphasis on the need for pro-market, rather than pro-business, policies. In other respects, however, finance is not at all like other industries: and looking for the roots of its problems through that lens therefore leads to blind spots.
Banking is the most obvious and important case in point. Banks make loans, and in the act of doing so create deposits. Under normal conditions this is a profitable activity, because the interest banks charge on the loans is higher than the interest they pay on the deposits. It is also not something that any other kind of business can do: banks need a licence from the Bank of England to operate. The profits from lending and money creation are what economists call an economic rent: they flow from the arbitrary ownership of a legal right (in this case, the right – literally – to print money), rather from hard work or judicious investment.
The essential reason banking is so profitable is therefore not because, like any other industry, it engages in sabotage. It is because it is a unique kind of public-private partnership in which a central function of government – the management of the national currency – is delegated to certain privileged private institutions. It is true that the existence of this arrangement opens up additional opportunities for banks to skew it further in their favour – which no doubt qualifies as sabotage. But the fundamental fact is that banking is intrinsically uncompetitive, and hence intrinsically profitable, even without any sabotage at all.
Downplaying the uniqueness of finance in this way has consequences when it comes to the book’s policy conclusions. It makes them simultaneously too extreme, and not extreme enough.
On the one hand, Sabotage’s Veblenian perspective makes it excessively anti-innovation. In the aftermath of 2007-09, it was easy to agree with Paul Volcker, former chairman of the Federal Reserve, that the only really useful financial innovation of the past half-century had been the ATM. That would seem to lend credence to Nesvetailova and Palan’s argument that most financial innovation is really about creating situations of temporary monopoly or securing unfair informational advantages over clients or regulators.
Yet ask anyone today who uses a smartphone app to buy their holiday money at wholesale market rates whether they would like to return to the days when you could only do so at a high-street bank charging a 5 per cent mark-up, and I am pretty sure they would say they prefer the new services. I tend to think that the right kind of innovation has a major role to play in fixing finance’s flaws.
In other respects, however, Sabotage’s practical conclusions are not radical enough. Eliminating bankers’ enjoyment of the economic rents that result from the current structure of the monetary system, for example, cannot be done without fundamental structural reform well beyond what the authors recommend.
At the very least, it would need a step change in the amount of capital the private owners of banks are required to maintain as a buffer against potential losses, so that taxpayers are less likely to have to pick up the bill – a case argued in detail by Anat Admati and Martin Hellwig in their 2014 book The Bankers’ New Clothes. To actually eliminate the problem, one would need to shift to a system of “narrow banking” – segregating the monetary and credit functions of the banking sector by requiring deposits to be backed not by loans but by reserves at the Bank of England.
1917 didn’t quite do it for me: the standards set by its legions of illustrious predecessors are just too demanding. Sabotage, on the other hand, turned out to be a nice surprise – because it does bring a distinctive and valuable framework for analysing finance to the table. Yet ultimately I was not convinced that its novel perspective includes the most important parts of the story.
Both 1917 and Sabotage, however, deserve high praise for fulfilling the most valuable injunction of all when it comes to catastrophic crises with terrible human costs: never forget.
Felix Martin is the author of “Money: The Unauthorised Biography” (Vintage)
Sabotage: The Business of Finance
Anastasia Nesvetailova and Ronen Palan
Allen Lane, 240pp, £20
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This article appears in the 29 Jan 2020 issue of the New Statesman, Over and out