Sin and the City
Twenty three years ago, the City was excitedly awaiting the Big Bang – the moment which would usher in a new era of self-regulation of the financial services industry. I had a grandstand view of the impending arrival. The legislation to prepare for the Big Bang was called the Financial Services Bill, and I spent several intense weeks leading for the Opposition as the Bill was taken through its Standing Committee stage.
Mrs Thatcher’s government, in line with its free-market philosophy, was very clear that the City could in essence be trusted to regulate itself. They resisted all attempts to give the regulators some teeth. The next few years of what some called self-regulation but which was in reality a free-for-all saw a huge expansion in financial services, in the size of the institutions providing them, in the sums of money involved, and in the rewards “earned” by those who worked in the City.
For those of us who argued at the time that the “free” market was not infallible, and (in line with Keynes, who had warned that financial markets were peculiarly prone to excess) that the City would require substantial regulation, subsequent events have come as no surprise. Even we, however, could not have foreseen the size of the money-go-round, spinning ever faster, that produced outrageous fortunes for a few and, eventually, crash and ruin for many.
Nor could we imagine that it would be a New Labour government that would become the most enthusiastic cheerleaders for the new lords of the universe. So dazzled were Ministers by the riches generated in the City that they did not think to enquire as to how many of those they claimed to represent actually benefited from the new wealth – wealth largely gouged out of the pockets of the rest of us.
The current revulsion at City excesses – the inflated bonuses, commissions, salaries and perks – is understandable; so, too, the anger at the growing evidence that nothing has changed and that those responsible for the mess will be paid mega-bucks for (allegedly) cleaning it up.
But the reaction to the greed and irresponsibility of the financial free-for-all, while natural, is a diversion from the real point. The reason for the government’s continuing genuflection to the City is that, after 23 years of unregulated City operations, and a growing reliance on financial services to keep the economy moving forward, the collapse of the City means that there is nothing much left.
The game is given away in the Chancellor’s statement this week on his plans for future regulation of financial services. His constant references to the importance of the City to our economy should be seen, not as an endorsement of the course followed over the last 23 years, but as a confession of failure. It is an admission of how far governmental indulgence of City excesses has distorted our economy and how big has been the price that the rest of us have had to pay for the rewards that City operators have milked from that same economy.
The real damage suffered as a consequence of the City’s domination of our economy is not to be measured, in other words, only in terms of the current crash and financial meltdown. The weight given to the City’s interests over a long period has seriously distorted our economic performance – and the more successful the City seemed, the more important its earnings to our national accounts, the more other parts of the economy were allowed to wither away.
The problem is not a new one; it was Winston Churchill who, as Chancellor of the Exchequer, remarked in 1925, “I would rather see Finance less proud and Industry more content.” An excessive attachment to the interests of those who hold and manipulate existing assets, at the expense of those who want to create new wealth, is – after all – a characteristic of mature economies which have substantial assets to protect – and we have been a mature economy for 150 years.
But the era of self-regulation and the demands of the global market meant that this policy bias became magnified many times over. Economic policy as a whole was tailored over this period to serve the City’s interests – so consistently, and over such a long time, that it was no longer recognised as abnormal. There was, we were assured “no alternative”; the global market meant that if the City were not given free rein, others would muscle in on their territory.
So, monetary policy was given centre stage. The policy itself was handed over to bankers, so that it was no longer subject to scrutiny and Ministers were no longer accountable for it, but so that it could be decided for a limited purpose that – arguably – primarily served the purposes of one part only of the wider economy.
Macro-economic policy was largely abandoned. Keynes was dismissed and forgotten. Interest rates were pressed into service to maintain the value of the currency and to underpin financial assets that might otherwise have been regarded as of dubious value. Little or no attention was paid to the competitiveness of the rest of the British economy, so that any thought of following an exchange rate policy that would stimulate exports, employment and investment simply never occurred to our policy-makers; manufacturing in particular was allowed to continue its relentless decline. Most of our economic eggs were placed in the financial services basket and only City operators had access to the golden eggs amongst them.
That is why the global crisis has hit the United Kingdom harder than anywhere else. The financial meltdown has meant that we have nothing much else to fall back on. And that is why the government has gone back – cap in hand – to the authors of the great misfortune, to ask them to dig us out of the hole. There is no better hole to find.
Millions will pay the price of the financial collapse with their jobs, homes and taxes. But many more – and over a much longer period – will suffer in ways that they do not even recognise as a result of the policy priority given to City fat cats whose primary focus remains their own privilege rather than the British economy. Whether through indifference or cowardice, our politicians seem intent on perpetuating a 23 year-old error.
Bryan Gould
6 July 2009
This article was published in the online Guardian on 9 July
Filthy Rich
If the “filthy rich” are no longer rich, how are we now to describe them? The question is not a new one; the role of those who gouge wealth out of the rest of us by manipulating existing assets has long been an issue of controversy. It was Winston Churchill who, as Chancellor of the Exchequer, said in 1925, “I would rather see Finance less proud and Industry more content.”
The importance of the City of London to the British economy dates back more than 150 years. As the world’s wealthiest country at that time, it was perhaps understandable that we would develop an expertise in maintaining the value of our assets rather than in creating new ones. For good or ill, the management of financial assets became a more significant feature of our economy than of any other.
The disproportionate influence of the City was a major factor, through issues like exchange rate policy which was always rigged to favour asset-holders rather than wealth-creators, in our decline as a manufacturing country. It was only thirty years ago, however, that the policy bias really began to bite.
The critical development was the removal of exchange controls by Ronald Reagan and Margaret Thatcher. In one bound, international capital was free – free from the irksome business of having to comply with the requirements of governments representing democratic electorates, free to roam the world in search of the most favourable (even if short-lived) investment opportunities, free to behave quite irresponsibly since regulation had become a dirty word and a duty of care was owed to no one but the shareholders.
The City seized upon the opportunity. An expertise in managing, re-arranging, packaging, and creating new financial assets, and clipping the ticket in the process by means of huge bonuses and commissions, became the path to untold riches. So impressed were governments – and not least New Labour – by the wealth apparently created, so dazzled were they by the super-rich, that they deferred to them in every respect, getting off their knees only occasionally to heap yet more praise upon them.
But while the filthy became rich (and some, as witness Sir Fred Goodwin, remain so), what happened to the rest of us? Most of us were left far behind in the scramble for the goodies. The gap between rich and poor widened dangerously, and our masters were left wondering as to why society was no longer as integrated as it had been.
And while a few became rich, our economy was left dangerously dependent on the manipulation of financial assets. As the masters of the universe topple off the high wire, we now see that the British economy is worse placed to face the crisis than any other.
For much of the global economy, the collapse of financial institutions and services is a crisis of credit and liquidity. The impact on the productive economy – where real goods and services are produced and sold – has been real enough, but when, sooner or later, the flow of funding is restored, so too will the productive economy recover.
For us, however, the crisis is not just one of liquidity. It is one of solvency – and the solvency (and future viability) in question is that of a major part of our economy, one that we used to think would go on providing a growing proportion of our export earnings and our real national wealth and income.
Our problems are intensified because our reliance on financial services has meant a corresponding and catastrophic decline in our capacity to produce real goods and services. The proportionate contributions of banking and financial services to our GDP and total employment have been growing while those of manufacturing have been falling and that trend had been gathering pace.
The collapse of our banks and financial institutions means that we are left with a gaping hole in our ability to maintain our standard of living. A whole chunk of what we thought was our capacity to create wealth has literally disintegrated. Our ability to pay our way in the world may now rest on those activities like manufacturing which have been neglected and starved of investment for so long that we simply cannot breathe life back into them overnight.
Little wonder, as the volume of the government debt incurred to bail out the banks rises, that international commentators see a bleak future for us and advise investors to get their money out of Britain and out of British assets. Little wonder that the housing market is flat on its back and that the pound has dropped like a stone.
Even draconian action, like leaving the banks to sort out their own solvency problems and treating the creation of credit as a public rather than private responsibility, would do little to turn things round in the immediate future. Sir Fred may continue to live the high life on his pension, but the rest of us are paying a heavy price for the greed of a few and for the failures of successive governments to do the job they were elected to do – and we will go on paying that price for a long time to come.
Bryan Gould
14 March 2009
This article was published in the online Guardian on 16 March 2009.