Capitalism is doomed if ethics vanish, says Bank of England governor

Mark Carney issues strong critique of City behaviour and warns of growing sense that basic social contract is breaking down

The Guardian, Angela Monaghan, Tuesday 27 May 2014

'We simply cannot take the capitalist system for granted,' says Carney.
Photograph: Andy Rain/EPA

Capitalism is at risk of destroying itself unless bankers realise they have an obligation to create a fairer society, the Bank of England governor has warned.

Mark Carney said bankers had operated a "heads-I-win-tails-you-lose" system. He questioned whether traders met ethical standards and said that those who failed to meet high professional standards should face ostracism.

Speaking at a City conference, the Bank's governor warned that there was a growing sense that the basic social contract at the heart of capitalism was breaking down amid rising inequality. "We simply cannot take the capitalist system, which produces such plenty and so many solutions, for granted. Prosperity requires not just investment in economic capital, but investment in social capital."

In a strongly worded critique of City behaviour in the run-up to the financial crisis, Carney said market radicalism and light-touch regulation had eroded fair capitalism, while scandals such as the rigging of Libor markets had undermined trust in the financial system.

"Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself. To counteract this tendency, individuals and their firms must have a sense of their responsibilities for the broader system."

Carney told delegates at a conference on inclusive capitalism in London – which was attended by the former US president Bill Clinton – that big banks had operated in a "heads-I-win-tails-you-lose bubble", with personal gain hotly pursued by bankers.

"All ideologies are prone to extremes. Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith. In the decades prior to the crisis such radicalism came to dominate economic ideas and became a pattern of social behaviour."

The governor added that policymakers and regulators in the UK and internationally were addressing ways of making the system fairer and of limiting the likelihood of a future financial crisis through reforms.

But he stressed that there was a greater onus on banks and also bankers to take responsibility. Referring to changes afoot, after the scandals in fixed income, currency and commodity markets, he said: "Such changes are vital but they cannot anticipate every contingency or discipline every miscreant.

"The scandals highlight a malaise in corners of finance that must be remedied. Many banks have rightly developed codes of ethics or business principles, but have all their traders absorbed their meaning?

"Consideration should be given to developing principles of fair markets, codes of conduct for specific markets, and even regulatory obligations within this framework. There should be clear consequences including professional ostracism for failing to meet these standards."

He said G20 leaders and international regulators on the Financial Stability Board were working to resolve the issue of financial institutions that were "too big to fail", a problem which left taxpayers with a huge bill at the onset of the crisis in 2008.

"This is the year to complete that job," he said. "Perhaps the most severe blow to public trust was the revelation that there were scores of too-big-to-fail institutions operating at the heart of finance. Bankers made enormous sums in the run-up to the crisis and were often well compensated after it hit. In turn, taxpayers picked up the tab for their failures."

Carney said that ultra loose monetary in the UK had helped to prevent a lost generation of long-term unemployed, and improved long-term social mobility prospects.

He added new powers and responsibility handed to the Bank by George Osborne should help to reduce incidence of financial crises.

He said one of the lessons of the crisis was that compensation schemes that delivered large bonuses for short-term returns encouraged individuals to take on too much long-term risk. "In short, the present was overvalued and the future heavily discounted."