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.





Our aim should be a growth economy not a balanced one

17 11 2010

 * This is a seconding speech I made alongside Richard Lambert from the CBI against the following motion at this debate organised by the Royal Academy of Engineering, 

 This House believes that a manufacturing sector accounting for at least 20% of GDP will provide the only basis for a balanced UK economy

Many myths have grown up around the problems of the UK economy post recession-not the least of which is that the recession was apparently caused by some unemployed scroungers in Newcastle. But before we consider what kind of economic policies we need and how we should shape the future we need to avoid falling for the myths rather than the facts.

For example, we all know that it was the financial services sector that provided much of the dynamism of our economy in the past 15 years. It was the fastest growing sector, the motor of the economy, and had enormous positive knock on effects for the rest of the economy, not the least of which was to enable the state to create nearly a million new jobs. Even today, post recession, living standards in the UK are far higher than they were 15 years ago.

The financial crisis has been interpreted by some as a sign that we should look for a different way of organising the UK economy, hence today’s debate. There has been a growing distaste for the financial services which created prosperity, summed up by Vince Cable’s attack on the ‘spivs and gamblers’ in the city, and a more general sense that greed is to blame for our problems.

But it would be a mistake to conclude that what has happened over the past two years was because of an over reliance on the financial sector or the product of outrageous greed. The problem with the financial sector was not its dynamism per se, but that ultimately it fuelled a bubble which then burst-as bubbles tend to do. The problem was  not the dynamism which it brought to the country, ie the growth itself -which most of us enjoyed the benefits of- but the fact that it was based on a credit bubble and was ultimately unsustainable. Had the bubble not burst we would I am sure all still be happily doubling up on our credit card bills and inflating our house prices.

The point is that it would be a mistake to infer from the financial crisis that any one type of business would be necessarily immune from this kind of bubble. Currently it looks as if there is a bubble emerging in the BRICS, the developing countries, as huge amounts of money are moving into manufacturing and other businesses there. We saw in the recent past how a bubble emerged around the digital industry at the time of the dot-com boom and bust. There is nothing about the specific character of any  industry which can guarantee stability or prevent bubbles. The problem of investment bubbles is a general one, outside the scope of this debate

Secondly, the idea of balance is itself problematic, as it implies that balance is more important than growth. The concept  of a balanced economy has two major problems. Firstly it runs against the tide of globalisation. The world economy has become globalised and operates increasingly through an international division of labour. Countries which develop a particular area of expertise, such as the Finns in electronics or indeed the UK in financial services, can then sell their products globally.

Secondly, balance also carries connotations of the status quo ante, of going back to some prelapsarian state  when the making of things rather than money was virtuous, almost a romantic idea of how economies work. At this stage it is far more important for us to be trying to identify what we can bring to the world market in a better way than our competitors, to identify what can provide the engine of growth we need to break out of the current stagnation. Balance also contains within it the idea of sustainable growth, code for a slow or even stagnant economy. Consciously or unconsciously it is an endorsement of the lack of dynamism of our economy and offers only a further diet of austerity.

Of course, it may turn out that manufacturing can play this locomotive role , or the digital sector I work in and which the Coalition Government is very keen to push, but it might also continue to be the expertise we have in financial services, on a non bubble basis. Or indeed it could be a combination of one or other of them.  Indeed, I must confess an enthusiasm for engineering more generally, I would certainly like to see more large-scale infrastructure projects being backed by the state for example.

To sum up, it would be a mistake to put arguments for promoting manufacturing in order to achieve balance in front of arguments for growth. We need to focus on value, however it is created. Better a one-sided growth economy than a balanced stagnant one.





Why those working in the financial sector need to tell the truth about the crisis

1 11 2010

When Vince Cable recently attacked the ‘spivs and gamblers who did harm to the British economy while paying themselves outrageous bonuses’ he summed up what many think is the problem with the finance sector. Politicians like Cable have led the way in blaming the banks for taking too many risks out of greed and thereby causing the recession. We all love to find scapegoats for our problems and the banking industry has become the main scapegoat for our economic woes.

The reality is somewhat different from the story. The  banks’  massive extension of credit was in fact a government backed attempt to stimulate stagnating western economies artificially by pumping up consumption. The slicing and dicing of credit in the form of derivatives and other financial instruments prior to the recession was an attempt to spread the risk of this explosion of credit. The real problem is that investment in productive areas of the economy requires genuine risk and not enough of that kind of risk is being taken in western economies. Spending money on new research and technologies has no guaranteed pay off, it’s far easier to sink your cash into property and hope for a steady return.

Bankers operate within the parameters set by those whose money they manage. The supposed surprise that politicians now express at the way banks behaved is disingenuous. All the main parties were fully behind the credit boom. To express surprise and shock now as Cable and others have done is simply dishonest. Blaming greed is foolish and hypocritical. Indeed many of the same people who blame greedy bankers and consumers in the west for our problems are urging the Chinese and others to increase consumption so they will buy more of our exports.

The Hotwire survey reveals a great deal of defensiveness within the financial sector. While this may not be surprising it is unfortunate. The financial sector has attracted many of the brightest people in the UK. These people need to be more upfront about what really needs to be done to help our society move on. The Hotwire respondents felt for example that too much transparency may not be good for the industry; let us hear this argument being made more forcefully in the face of those who believe that more and more regulation is the answer.

Blamed for the crisis and also seen as responsible for the way out of it, some bankers hope that better corporate responsibility will restore trust. But in truth, the message that bankers need to get across is that economic stagnation cannot be solved by more regulation of banks but requires a much more fundamental reappraisal of how the west is run. Rather than spending their efforts on persuading us they are not greedy, those working in the financial sector would be better spelling out the real economic dangers we face. This would be taking real social responsibility.

*This is the preface I wrote for a report by Hotwire PR which was launched at this event, at which I was also speaking





What next for UK banking? Not learning from the past apparently

15 12 2009

uk after the recessionI was at this event yesterday jointly organised by the New Statesman and Barclays Bank and addressed by representatives by the three main political parties. John Varley, the Chief Executive of Barclays Bank, began by arguing that banks should adopt more social responsibility, by which I think he means not to get into the same mess as last year again.

Two things struck me from the discussion. The first is that there is hardly a cigarette paper’s difference between the three parties on the issue of banks or by implication in their understanding of the recession. They all supported the populist tax on bonuses (described privately to me by one senior banker there as ‘puerile’). They all agree that there should be more competition in banking, better management of risk  and better regulation. One wonders yet again why there are three parties when there are virtually no policy differences between them. The cosy atmosphere was upset only marginally by John Snow asking why no bankers were in jail yet.

The second problem is that in this discussion, supposedly about the future of banking, there was disappointingly no discussion about the role that banks could be playing in the regeneration of the UK economy.  The whole discussion was about  not repeating the mistakes of the past rather than tackling the problems of the future. Lord Myners, Labour’s  Financial Services Secretary to the Treasury, mentioned in passing that there no longer appeared to be a blockage in banks financing business, although the cost of credit was perhaps too high. The banks say that there is less demand for credit from business. If there is little demand for credit this should warn us that the economy is unlikely to see a fast recovery from the recession.

The main lessons from the recession appear to be passing the parties by. The financial bubble, as I have argued before, was not the product of too much risk taking but too much risk aversion. Investors were seeking ways of making money through apparently safe new financial ‘products’ rather than through investment in apparently riskier new industries and new technologies.

The government now effectively controls two of the major banks in the UK. It would be a good idea if it could enter into some major planning exercise to encourage investment from these banks in the kind of infrastructural projects that the UK desperately needs. It would also be a good idea to encourage these banks to set more investment aside for innovation and those areas of the UK economy which have the most promise.

None of the parties is facing up to the real problem facing the UK economy, what is going to be the engine of growth if financial services does not recover its dynamism, a prospect which appears to be receding all the time. Banks have a role in solving this problem, but the leadership has to come from politicians and there is precious little sign of that at the moment.