The Blog

Brussels Looks for Scapegoats

A friend of mine recently returned from meeting with the Environment Agency bursting with indignation and frustration. He had gone to investigate why the Agency was doing so little in terms of funding new projects to address environmental problems or to take advantage of environmental business opportunities. The answer he got astounded him: environmental legislation was what was slowing the European economies. Far from investing in new technologies or solutions, what everyone in Brussels wanted to do was rip up existing legislation and set the markets free.

There is, of course, no meaningful connection between environmental legislation and the failure of banks, the failure of currencies and the general economic malaise that besets Europe. To blame it on the bees is preposterous but indicative of just how powerful the lobbying of Brussels has become. Never ones to waste a crisis, many large business institutions are trying to use this one to tear up the few protections that European legislation offers to consumers and citizens.

This may of course also be a prime example of displacement activity. Rather than fix the banks, let's blame the innocent. Because what's clear is that the banks have not been fixed and the economies that depend on them are still critically vulnerable. That was the analysis offered by Stanford's Anat Admati last month when she pointed out the following terrifying facts:

The banking system is still fragile, over-leveraged and too dependent on short-term debt and deposits

The banks are still highly connected and woefully prone to copying each other

The over-the-counter derivatives market remains dark and fundamentally unregulated

Off-balance sheet vehicles (once called SPVs, now called VIEs) make it impossible to see what's really going on. (See Frank Partnoy's forensic analysis of Wells Fargo, ostensibly one of the more conservative banks)

We have fewer banks that are bigger, not smaller ones that we can allow to fail

Banks are still not lending in meaningful amounts to real businesses; they still mostly lend to one another, thus concentrating risk

Bankers are under more pressure than ever to deliver alpha because those profits are needed to boost balance sheets

The banks, Admati argued, are like trucks laden with explosives speeding through residential neighborhoods. We have a few more emergency vehicles than we used to - but that doesn't make the trucks or the neighborhoods any safer. If anything, the safety nets just encourage more dangerous driving.

There was a moment, at the beginning of the crisis in 2008, when I imagined that perhaps it would turn out well; that the world would be forced to think seriously about reducing consumption, making infrastructure sustainable and employment more equitable. Ever the optimist, I hoped we wouldn't waste the crisis.

But now it appears we have done worse. Not only have we not risen to the challenge of making our banks safe; we appear to be on the brink of using them as an excuse for further environmental degradation. Tear up the legislation and burn baby burn.