By
Alex Brummer: Amid the recent management shake-up at
the top of the Bank of England, as it was dragged into the
investigation of the fixing of the £3 trillion-a-day
foreign-exchange markets, one crucial appointment went almost unnoticed.
While public attention was
understandably focused on an Egyptian-born mother of twins becoming
only the second female deputy governor of the bank, the far more
influential appointment was that of economist Ben Broadbent.
As the new deputy governor for monetary policy, he is now the predominant voice on the future direction of interest rates.
His work will have a
huge effect on the lives of the British people, for he will have a key
role in deciding when the record five years of super-low mortgage rates
will end — a decision that will inevitably lead to home-owners facing
considerably bigger monthly bills.
But
there is one crucial fact that should concern us about the Cambridge
and Harvard-educated Broadbent: he spent a decade during the
boom-and-bust years as the senior economist at the global headquarters
of the investment bank Goldman Sachs.
He
joins an elite few who hold senior positions in the world’s most
powerful central banks — from London to New York, Frankfurt and beyond —
and all of whom come from this one company, which was controversially
described by Rolling Stone magazine as ‘a great vampire squid wrapped
around the face of humanity, relentlessly jamming its blood funnel into
anything that smells like money’.
The
fact that so many alumni of the world’s most profitable — as well as
most ruthless and cunning — investment bank wield such a level of
influence in these central banks is nothing short of remarkable.
Because
Goldman Sachs is an institution that, as I will explain, not only
helped cause the financial crisis in 2008, but also profited from it —
hugely enriching its own staff while leaving a trail of chaos for
taxpayers to clear up.
Goldman Sachs is an institution that, as I
will explain, not only helped cause the financial crisis in 2008, but
also profited from it — hugely enriching its own staff while leaving a
trail of chaos for taxpayers to clear up
Do we really want one of the
most controversial financial institutions on the planet, which was
eventually fined a record £343 million for shamelessly misleading
investors during the crisis, to have so many of its ex-staff holding the
levers of power in the City of London?
What
makes the choice of Broadbent an issue of major public concern is that
his period at Goldman saw the New York investment firm deeply embroiled
in some of the most shocking financial scandals of recent years.
First,
there was the crisis triggered by the sub-prime mortgage disaster, when
vast quantities of loans were made by U.S. banks to homeowners who
could never pay them back.
This
reached disaster point in 2007-8, once the loans had been sold on by
banks and institutions around the world — by which time they had been
packaged up as financial instruments or ‘derivatives’ so complicated
that no one could tell how toxic they were.
Goldman
Sachs played a key part in inventing these poisonous derivatives, which
were a major factor in triggering the financial crisis.
But
even more morally offensive was that once people finally began to
realise how dangerous these derivatives were, Goldman Sachs started
making money by speculating in the market that they would collapse in
value.
So not only did the bank help create the crisis, it also profited from it.
It was the same Goldman
Sachs that, during the financial crisis in 2008, when, like all
financial institutions, its shares were falling, accepted a $10 billion
bailout from the U.S. government.
Handily,
many of its former staff — such as Hank Paulson, who was then U.S.
Treasury Secretary — happened to be in key posts in the government when
the decision was made.
Then there is the fact that Goldman
Sachs reportedly arranged with the Right-wing Greek government to
present the national accounts in the best possible light so that Greece
could join the Eurozone in 2001. The bank was subsequently involved in
elaborate schemes that masked the true horror of the country’s public
debt crisis, which saw Greece having to be bailed out by the EU and left
in economic ruins.
Despite
this, Goldman bosses were able to pick up $111 million in bonuses soon
afterwards, which were understandably branded an outrage as they were
awarded during the worst recession for 80 years — one that had mainly
been caused by irresponsible bank behaviour.
Influence in high places,
though, did not stop Goldman from being heavily fined by the Wall Street
regulator, the Securities & Exchange Commission (SEC), in 2010 for
selling dodgy complex securities, based on sub-prime mortgages, to
clients including the hapless Royal Bank of Scotland.
What
makes the behaviour of Goldman Sachs so shameless is the arrogance with
which it has sought to protect its reputation and the claims its bosses
like to make for its integrity.
The
group’s chairman and chief executive, the smiling and fast-talking
former trader Lloyd Blankfein, stunned everyone last year when he
offensively boasted — amid Goldman’s return to fat profits — that the
bank was doing ‘God’s work’.
Perhaps
it is this arrogance that enables former Goldman executives, such as
Ben Broadbent at the Bank of England, to rise ineffably to the very top
jobs in international finance.
With
the approval of Chancellor George Osborne, 49-year-old Broadbent was
plucked from his relatively obscure role as an external member of the
Bank of England’s Monetary Policy Committee and promoted over the head
of the Old Lady’s best and brightest internal prospects.
His
elevation to the top economic role at Britain’s central bank means he
will now be making the crucial interest rate, inflation and growth
forecasts for the Bank’s quarterly Inflation Report — on which key
decisions are made that affect millions of people.
Broadbent’s
promotion must have seemed the most natural thing in the world to the
Bank of England’s Canadian governor Mark Carney.
Carney,
after all, is himself an Old Goldmanite and a member of the most
exclusive club in world economic policy-making — much more influential
than David Cameron’s kitchen cabinet of Old Etonians.
Carney spent the largest stretch of his career — from 1990 to 2003 — working for Goldman Sachs in Tokyo, New York and London.
Alumni: Bank of England Governor Mark Carney,
left, spent the longest stretch of his career working at Goldman Sachs.
The chairman of the European Central Bank, Mario Draghi is another
former Goldman Sachs banker
The choice of Goldman bankers
for senior roles at the Bank of England is a novel development for an
institution that has always frowned on any suggestions of dual loyalty
or conflicts of interest.
When
Gordon Brown was Chancellor (from 1997 to 2007), he steadfastly refused
to appoint the person many regarded as the most talented economist of
his generation, Gavyn Davies, as governor of the Bank of England.
Brown
feared a political backlash because of Davies’s role as the millionaire
chief global economist at Goldman Sachs, and the fact that his wife,
Sue Nye, was a special assistant to the Chancellor.
However,
despite 13 years in a variety of roles at Goldman, and a successful
stint as governor of the Bank of Canada, Carney was given not only the
Bank of England role but also the job of chairman of the Financial
Stability Board.
This is
the body established by the G20 committee of rich and emerging market
nations to try to reform global banking — including the rapacious bonus
culture — in the aftermath of the 2007-9 credit crunch.
Indeed,
Old Goldmanites seem to be everywhere. When Broadbent and Carney meet
fellow central bankers, there will be a number of familiar faces around
the table.
The Goldman Sachs booth at the NYSE: The banks
culture of ever-more complex securities and trades was at the core of
the financial crisis
The chairman of the European
Central Bank, Mario Draghi, who is credited with rescuing Euroland from
total implosion with his promise to do ‘whatever it takes’ to save the
euro, is another former Goldman Sachs banker.
Arguably,
he is the most powerful figure in European finance, having forced
Euroland interest rates down to rock-bottom levels and bought the
government bonds of Europe’s struggling ‘Club Med’ economies before
exchanging them for cash.
He is now trying to tackle Europe’s near-bankrupt banking system.
In
the U.S., there is the amiable Bill Dudley, the former head of U.S.
economics at Goldman, who is now president of the Federal Reserve Bank
of New York, the operating arm of America’s central bank.
Goldman
boss Lloyd Blankfein once explained to me that one of the advantages of
paying Goldman Sachs’s bankers so lavishly — they sit at the top of the
bankers’ pay league — was that the ‘partners’ can retire young and very
rich, and then go off to jobs in the public service.
There
is, however, a deeply disturbing paradox in the fact that Goldman
bankers are now effectively running the world’s monetary system.
The
Goldman culture of creating ever-more complex securities and trades,
coupled with absurdly high pay and bonuses as incentives for the bank’s
workforce, were at the very core of the financial crisis that brought
the world to the brink of economic collapse and led to a long period of
painful austerity.
None of
these former Goldman economists and executives, who are now the
overlords of the global economy, seems to have predicted the fact that
the world was sitting on a financial time-bomb.
It
seems very strange that when there are so many talented economic
thinkers, Nobel prize winners and lifelong central bankers to be called
upon, it is nearly always Goldmanites that carry off the plum jobs.
Allowing
such a cultish group to control the levers of global finance shows, I
would suggest, a worrying lack of imagination and judgment by the ruling
class of politicians that appointed them.
The
concentration of such huge economic power in the hands of a small cabal
of economists and financiers, drawn from such a narrow pool of
interests, is deeply unhealthy.
However
honourable the motives of this group, there remains a fear that when
the next crisis comes — as it inevitably will — their concern to protect
their cronies in the banking world will take precedence over their
responsibility to look after the long-suffering public.
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