Why breaking up the banks is not the solution to the UK’s economic woes

8 02 2011

 

 

 

 

 

 

*This is a seconding speech to be made at this event alongside Kitty Ussher of Demos against Phillip Blond, the so called ‘Red Tory’

The truth is that poor profitability in productive industries fed the Wall Street monster; that is why it has had so much money to play with. Sean Collins 

The argument for breaking up the big banks, to separate investment banking from retail banking, is based on a flawed analysis of the underlying causes of the financial crisis and the recession which followed. While I hold no brief for the financial sector, the public campaign to break them up is based more out of a desire for revenge than a clear understanding of what needs to be done to make our economy dynamic.

The financial boom and bust was not the product of risky behaviour by bankers, something that those who argue for the break up generally contend. Rather it was the outcome of government sponsored credit expansion policies, here and elsewhere. Low growth rates were artificially stimulated by easy credit policies. The banks were certainly complicit in this behaviour as executors of a strategy of bolstering consumption instead of investment, but they were not the cause. The banks have become scapegoats for the recession, accused by many of the same politicians who encouraged them to keep on lending when times were good.

The fault for the crisis lay with those who believed that a consumption based credit boom could continue forever. We can now see how wrong that belief is. But the real problem facing the UK economy is now laid bare. It is not insufficient consumption that is our problem, but lack of productive investment, in all types of businesses and also in the basic infrastructure of our country, in its roads, railways and power stations. Money, the most fungible of all substances, will continue to flow to where the biggest profits can be made whatever walls are built to stop it. As long as there is no profit to be made in productive investment, money will inflate the next bubble instead.

Breaking up the banks will not help to solve this problem of under investment, and the disruption to banking that would ensue may even hinder it. We need the banks to do their job of lending more effectively than they presently are. Breaking them up is likely to hinder not help that process.

Military thinkers are often criticised for always trying to fight the last war. It would be a mistake for us to now want to focus on what happened in the past rather than what needs to happen in the future. We need to forget about revenge on the bankers and focus instead on the huge task of recovering growth in our economy. The constant harping on about banks and bankers has acted as a giant displacement activity. Being envious about bonuses is far easier than working out how to solve the growth problem. Fantasies about a return to some mythical past when small businesses ruled the roost will not help us to prosper in a globalised economy. It is time to let the bankers get on with their jobs. Instead of backward looking banker bashing we should be working out how we can make this a successful country in the 21st century.

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6 responses

8 02 2011
Johny Morris

Although there is a lot of truth in the above the conclusions are false. The banks need to be broken up for two reasons. Competition and moral hazard. Having a limited number of suppliers in an industry does not encourage innovation or product development. Loans, like any other product, need to be differentiated if all sectors of the potential market are to be covered. This will not happen with a handful of monolithic enterprises. Secondly, banks must be allowed to fail without trashing the whole economy. Potential failure is the ultimate litmus test of success. Being too big to fail provides perverse incentives to economically unsound activity and stifles innovation. But the author is right – the arguments should be on sound economic principals not emotional, retaliative ones

10 02 2011
Focus on banks is a “giant displacement activity” › The American Situation

[…] and Philip Blond of Res Publica, and he has posted the text of his pointed speech on his blog (here). Killick argues that the focus on banking misses the point:  The financial boom and bust was not […]

2 04 2011
neil craig

“solving the growth problem” is easy if any politician decides they want to do it. Simply get the building planning, elfin safety nuclear regulatory and other parasites out of the way. We could better Chinese levels of growth any time they wanted to let us.

1 11 2011
Clare

So, would it be fair to say then that the cause of the recession was the greed of the people, not the banks? After all, banks are only businesses and I am sure everyone who was sold a product by them was only too aware of this (even if not of the impending recession). I am sick of hearing people say that the recession of 2008 was caused by greedy banks and bankers rather than greedy neighbours who just had to have that Skybox and new caravan and holiday to the Maldives despite earning a modest income. Is credit to blame fully/partly? Forgive my ignorance but I am sick of not being able to substantiate my annoyance at other people who will willingly take on credit but parrot back the old idea that only bankers can be greedy.

1 01 2012
Chris Attrill

It is partly the people, but also the banks.

Bankers had created a gambling culture in which the moral borders between legitimate trading activity, recklessness and criminal activity became even more fuzzy – and the disproportionate personal rewards disconnected from any economic and social reality.

After all, banks had doubled the share of casino-like trading assets in their aggregate balance sheet between 2000 and 2007 so that it stood at nearly 40%. In the crash, British and other Western banks would loose $900bn on their trading assets alone.

British bank assets had grown to five times the national output; only Iceland and Switzerland were more exposed.

If banks are allowed to do risky investment, then the next financial recession will be bigger than before – this cannot happen again.

1 11 2011
neilcraig

I would tend to say the greed of the politicians who let slip the reins of credit control and built a “boom” on the housing bubble. We could have gad a better, real bomm, by allowing industry to grow but they were ideologically opposed to that. The prime responsibility must go to Labour, since they were in power but neither of the “opposition” parties demurred.

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