It must rank as one of the least fair deals in economic history. Over the last 12 months, western governments have taken unprecedented and extraordinary action to avoid what undoubtedly would have been a global slump. The good news is that they have succeeded. The bad news is that what caused the crisis – the stranglehold of a new financial oligarchy upon public policy – has hardly been touched. And not only is this grossly unfair, but unless there is change, a second and more serious crisis potentially awaits.
The communique from the G20 finance ministers in London yesterday, emerging after they met to prepare for the big meeting of their leaders in Pittsburgh later this month, perfectly illustrates the dilemma. On the plus side, countries with very different economic philosophies, stages of economic development and national interests have managed to find some key areas to make common cause.
For example, they are sticking to their guns and following through with the huge fiscal and monetary stimulus necessary to put a floor under the global economy, and continue to find common ground on coming down heavily on tax havens, increasing the funding of the IMF and giving more formal influence to China.
Good. But what to do about the banking system and its bonuses, the excesses that created the credit crunch and division among the great nations? Banks are exploiting this vacuum to return to business as usual. It is hard to believe that only 12 months ago their recklessly overstretched balance sheets threatened an implosion of the western banking system.
This was an event that rivals and arguably even exceeds 1929 as a traumatic event in western economic history. The Wall Street crash radiated out from the US. The autumn 2008 banking collapse was global. Credit crunches at national level provoke declines in GDP of between 7 to 9%; when they happen simultaneously, the decline could potentially feed on itself to deliver a slump.
It took the commitment by western governments to increase their public borrowing by $5 trillion, slash interest rates and inject record trillions of liquidity into crocked banking systems to head that risk off.
Now as the global economy stabilises and the IMF lifts its growth forecasts for 2010, conservative voices are calling for a so-called exit strategy – freezing the stimulus and beginning a programme of retrenchment to allow the private sector to resume its starring role and avert any mild danger of inflation. This is one area where Gordon Brown speaks with conviction. He told the finance ministers and central bankers yesterday that it would be ludicrous to stop the stimulus before it is half- way through and only months into stabilisation. He is right.
Brown was correct to make the case for government activism. When private activity and borrowing collapse, public borrowing must rise to compensate. A rise in government spending and debt is proper after traumatising and depressive events. The same is true for the financial system. Governments have got to reform the entire structure of western finance –bonuses, credit rating agencies, capital adequacy requirements, banks that are too big to fail, the use of offshore tax havens, the role of derivatives – from top to bottom.
Here, yesterday's communique was disappointingly minimalist – a lowest common denominator between Europe and the US, with Britain sitting unhappily in the middle. Too little is happening and what is being done is so slow that it is imperceptible.
On the supercharged issue of bonuses, the agreement is that banks should claw them back if they move from profit to loss, while publishing details of their top salary earners. There is to be no cap; no outlawing of guaranteed bonuses; nor transparency in the process of bonus setting. It is the least that can be done, with a promised examination of tougher options by the Financial Stability Board offered to assuage the outraged Europeans.
The whole debate is extraordinary. Right-of-centre European politicians – President Sarkozy and his finance minister, Christine Lagarde, supported by the right-of-centre Swedish prime minister, who is currently president of the EU, and German Christian Democrats – believe that western governments should challenge the bank bonus culture head on. It is offensive, they think, that a banking system that owes its continued existence to massive government intervention should pay itself extravagant salaries and bonuses that are massively out of line with the top of business, let alone the ordinary taxpayer. They are right. France proposes a mandatory cap and the outlawing of guaranteed bonuses.
In opposition, there is allegedly left-of-centre Britain and the US – liberal politicians defending the indefensible. The bonus culture works on a London/New York axis, with financiers having a sense of entitlement to astonishing earnings that have no economic justification in terms of value creation or relation to profitability. In the US, for example, Merrill Lynch lost $27bn in 2008: 700 employees received bonuses in excess of $1m. AIG, the world's biggest insurance company, paid 377 members of the financial products division that lost $40.5bn (provoking AIG's bail-out by the US government) $220m in bonuses.
When this is what happens in a crisis, there should be no surprise that in 2009, as investment banks profits soar thanks to fewer competitors, cheap money and widened margins, so do bonuses. Witness the £30m guaranteed bonus Barclays has offered to a team of investment bankers it is poaching. Even in 2008, London paid £7.6bn of bonuses, only 40% down in a year when the system imploded. And 90% of investment bank profits is not directed to strengthen balance sheets or to shareholders in dividends, nor to customers in lower fees, nor to taxpayers – it goes as bankers' bonuses. Our role is to bail them out when things go wrong.
We know it is a scam. The Financial Times's Gillian Tett observes that far fewer financiers have been arrested in this crisis compared with the much smaller Savings and Loan debacle in the 1980s. She is right. We are far from that. Instead, Whitehall and Washington oppose more action just on bonuses as "impractical". Wrong. If G20 governments demanded limits and made continued liquidity provision dependent upon compliance, no bank could refuse. The threat of an exodus of bankers is nonsense. No bank trading outside the G20 in financial centres such as Dubai, Hong Kong or Dublin could muster the capital or scale to pay mega bonuses. The issue would be dead.
It is true that demanding that banks hold more capital will also attack the problem, but one avenue does not preclude the other. The G20 should be doing both aggressively, rather than temporising.
Obama and Brown are right to press for continuing the aggressive economic stimulation. They should show the same determination in confronting the powerful financial oligarchs who have so rigged the system in their favour – and their rewards. After all, they did very nearly bring the world down and could do so again.
Will Hutton, who has written a weekly column for more than 15 years: six years at the Guardian and nine years at the Observer.