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.

After Lehman-another year older and deeper in debt

17 09 2009

images[10]The anniversary of the collapse of Lehman brothers has provoked an orgy of retrospective comment. I hesitate to call it analysis because, as Charlie McMenamin has pointed out, the striking thing about all the comment has been the lack of any concensus even on what to call what has happened, let alone to provide an explanation for it. Everybody from President Obama downwards is saying that there can be no return to business as usual. Yet in the absence of any proper understanding of what happened business as usual is precisely what we will get.

If there is one emerging theme to the discussion it is that the whole thing is the product of aberrant human behaviour. In other words, there are no rational economic explanations for what happened, it is simply the product of human greed and irrational behaviour. The influence of economic behaviouralism is now making itself felt in most discussions of the recession and its causes. This approach was summed up in a  recent article on the credit crisis in the New York Times which ended with this comment,

“Ultimately, bubbles are a human phenomenon,” said Robert Shiller, a Yale economics professor and Cassandra of the current crisis. “People just get a little crazy.”

And what do crazy people need? More supervision, more regulation and tighter control of course. That is why the main thing that governments are focussing on is to try to rein in the greedy bankers by regulating what they do and their bonuses more closely. The deeper reasons for the recession are being virtually ignored. One severe consequence will be that the short term managerial approach to our economies exemplified by the last ten years of bubble economics will  be enhanced while any prospect of longer term strategic planning will diminish further.

Meanwhile it is worth reminding ourselves that in the real world the recession has taken and continues to take a terrible toll. As Mervyn King has helpfully pointed out, the end of recession does not compensate for the loss of output, the real drop in the wealth within our societies. In the UK we are only now beginning to experience this in the shape of higher unemployment and less money for public services. The OECD is predicting that a further 25 million people in high income countries will lose their jobs by next year and the World Bank that 90 million people will be pushed into extreme poverty in the developing world.

World trade is still severely depressed. There is evidence of the strengthening of protectionist tendencies, expecially in debtor nations like the US. The central problem of the imbalances between the developing and exporting nations and the rest of the world remains exactly as it was when the financial crisis started. All that has really happened over the past twelve months is that the financial system has been protected from bankruptcy. A symptom of the problem, excessive dependence on the financial sector,  has been taken for the cause, the loss of productive  economic activity in countries such as the US and the UK.

Diminished belief in the rationality of the market does open a small window of opportunity. It is not possible to plan capitalist society, but the weakening of an intellectual justification for the market opens the door to the possibility of thinking about what the advantages of a planned economy in a democratic society would be compared to the short term, chaotic character of modern capitalism.

The summer is over, what has changed and what needs to change?

2 09 2009

images[6]After a six week break I am returning to the fray, refreshed, reinvigorated and ready once again to try to make sense of the complex economic environment in which we live. The first thing to do is to draw up a balance sheet of what has happened in the intervening period before setting off into the future. So here goes:

1.As we explained back in May, while there are some signs that the technical recession, two or more quarters of negative economic growth, may be coming to an end, this does not mean that our problems are over. The financial crisis has to some extent been stabilised, but not resolved, through the massive and coordinated actions of central banks across the world. However the real impact of the recession is only now beginning to be felt. Unemployment is continuing to rise across the world and consumer spending is falling in most places. Real hardship is being visited on millions as a result.

2. The underlying causes of the recession have not been tackled,although there is increasing recognition in some quarters that this is the case and that we are storing up trouble for the future. The prevailing sentiment is that we should return to business as usual as fast as possible. While many see that there are problems with this approach, in the absence of any alternative plan this view will of necessity prevail.

3. There is an  intellectual void in the sphere of economics which is being filled by the irrationalities of the behavioural economists. The conclusion that many in the elite are drawing from the recession is that the view that the market is rational, which has prevailed for the past thirty years, can no longer be accepted. The problem is, as I argued in my review of a book by leading behavioural economists, that rather than this leading to a search for a more rational way of understanding and managing the economy, many are now saying that this proves that there are no rational explanations for human economic behaviour. This view and its consequences was summed up thus by Gillian Tett,

However, the unpleasant truth is that there is never going to be any complete intellectual system to explain how financial systems should work. ..That is not an easy idea to sell to politicians, voters or even regulators. After all, as Lord Turner points out, a world without a reliable compass is frightening, exhausting and time-consuming to navigate: “For the regulators of the world, once you have accepted that you don’t have an intellectual framework of ‘more market is always better’ you’re in a much more worrying space, because you don’t have an intellectual system to refer each of your decisions.”

4. In the UK the political parties are beginning to prepare for the next election in which the state of the economy is going to play a key central role. This discussion will take place in an  intellectual vacuum, or at best an intellectual climate in which the irrational is celebrated over the rational. The terms of the ‘debate’ will be over narrow issues, such as whether to call cuts in public spending ‘cuts’ (Tories)or ‘tough decisions on spending’ (Labour)

To sum up, we are entering a darker economic period with no intellectual framework nor any effective political leadership to help steer us through it. In these circumstances it is vital that more people focus on trying to comprehend the present as well as working out alternatives to what is on offer. This will remain the focus of this blog in the months before the next general election in the UK.

Will the UK retain its global financial role and withstand the threat from China?

22 07 2009
imagesThe Government remains confident in the UK’s position as a major international financial centre over the medium- to long-term 


This statement of belief is contained within the document Reforming Financial Markets which outlines the government’s response to the financial crisis. It is clear from this and elsewhere that whatever desire there may be to rebalance the UK economy towards ‘more engineering and less financial engineering’ in Mandelson’s words, there is still a widespread hope that the financial services sector can get its dynamism back.

It is easy to see why the government hopes that this will be the case. The financial services sector contributed directly to the boom of the past ten years through the growth of jobs in that sector and the prosperity it brought , particularly to London and the south east. It also paid a large part in financing the growth of public spending during that time. The decline of financial services is now contributing to the decline in tax income and adding pressure to the crisis in funding the public sector.

Creating an alternative dynamo for the UK economy outside financial services would require a level of effort from the ruling elite in the UK which seems way beyond its current capacity. Better to cross their fingers and hope for business as usual.

Financial services in the UK have a lot going for them and there is a strong historical incumbency factor which works where markets are concerned. However there are two main reasons to question the continued dependence of the UK on finance. The first is whether the financial services market in the west can recover full stop. There are still strong reasons to believe that the global financial crisis is far from over.

The second relates to the aspirations of China. As Martin Wolf has pointed out, China is historically unique as a developing world power in that it is simultaneously the world’s most dynamic growing manufacturing power as well as the fastest growing exporter of capital. It is this combination which has created the global imbalances which lie at the heart of the current crisis.

China has now set itself the task of turning Shanghai into the leading global financial centre by 2020. As the article cited makes clear, there are still major obstacles in the way of doing this. However, one has to be very optimistic to hope that the future dynamism of the UK economy depends upon outperforming the Chinese in this area.


What’s the plan,man?

15 07 2009

A8XEFT1CAXT4P7TCA1JOBWCCAJXXQ6PCADUCE7FCAE9O5HFCA2AB2C1CA7RY56NCAUP751PCACXR496CAOP464QCA32RQJMCAHWA3EHCABORIQTCA60IOB9CA95NVCGCA2Q5ZWXCAXXBXCXCAOWF5TWCAX8VIECStill nearly a year away from an election and sunk in recession, the UK is drifting through both a political and an economic crisis. Reports from inside the civil service indicate that Labour’s loss of direction is causing civil servants to sit on their hands and wait for a Tory government to sort things out. Yet as Martin Wolf  argues convincingly in today’s Financial Times, the recovery from recession is going to be very hard work.

The UK lacks a strategy for the future or any kind of vision of what we want to achieve collectively. Politics has become short termist and tactical. (The most influential book on Tory thinking is called ’12 Months To Renew Britain’). There are some very important questions which require answers in order to develop a proper long term answers.

The first is, what’s the plan? New Labour had ten years of relative success based on the boom in financial services. Tony Blair now admits they were lucky. The financial services sector is not going to recover to play the same role as it did before. So what does any incoming government think is going to be the driver of the UK economy? And what are they going to do, through tax incentives, infrastructure improvements, educational policies to encourage whichever parts of the economy offer the most promise?

Is it possible or indeed desirable, for example, for the UK or any developed economy to reverse deindustrialisation? All western economies have seen a continued growth of services relative to industrial production. Yet service industries are notoriously people heavy and so tend to have lower levels of productivity.

Is it possible to reverse the trend for the state to play a greater and greater role in the economy?As James Heartfield and others have argued, the role of the state in the UK economy has encouraged flabby business practices and protected weak businesses from going under. Large chunks of state spending go back into the private sector. Is there a better way of doing this or should the state move out of  many of the areas it currently manages?

What is the legitimate role of the state? There are many things the state should be doing, to develop a modern infrastructure or education system for example which it is not doing well enough. At the same time as the state cannot operate on the big issues it seems to want to micromanage our daily lives through interference and intrusion on a massive scale. How can this be reversed? We need to have clarity on these questions when discussing what public spending we need and what we do not.

These are serious issues facing the UK. In the run up to next year’s election they should be the focus of discussion and debate for anybody who is dissatisfied with the lack of vision being shown by the main political parties.

What future for business? Risk taking and innovation after the recession

8 07 2009


Whenever there is a panic in society, for example around swine flu, I usually find myself on the side of those saying ‘calm down, its not as bad as you think’. I generally take the view that as a society we are too risk averse and liable to panic. However, as far as the recession has been concerned the opposite is the case.  The recession now appears to have been a bad dream about greedy bankers and corrupt politicians from which we are awaking. The concensus appears to be to forget about it as quickly as possible and get back to business as usual. I feel like Cassandra, condemned to tell the truth but to be disbelieved, because there is no ‘business as usual’ and here are three reasons why.

The first is that the damage done by the recession is deep and likely to be prolonged. I say the damage done by the recession rather than the recession itself because technically the recession, defined as consecutive quarters of nagative growth, may be over or almost over, but the damage will linger on:

  1. Unemployment is continuing to rise
  2. Toxic debt has not been removed from the system
  3.  Banks are not lending
  4. The securitization business, provider of investment finance, has disappeared
  5. World trade has collapsed
  6. Global capital flows have slowed dramatically

Secondly, for the UK there is no business as usual for three main reasons. For the past ten years financial services have been the main driver or the economy. there is very little chance that this will return. Also the crisis in public sector finance, affected badly by the reduction of taxation from the finacial services sector and the costs of propping up the banks, will mean big challenges for the public sector in terms of employment and services. Lastly our political class has run out of ideas and lost a large amount of authority. This will make any hard choices difficult for it to take.

Thirdly, real change in the economy will require inevitably some risk taking and more innovation. Yet even before the recession the UK had the lowest Research and Development and Venture Capital investment in the developed world. The recession, according to the Future Foundation, has made business even more risk averse.

We are culturally a safety first society. We view new developments in science and technology with suspicion and hostility. We are over protective to an absurd degree of our children and ourselves. Is it possible to imagine that this kind of attitude will foster and encourage a dynamic econopmy?

Take the banking crisis. We have capitalism which cannot stand on its own two feet and a state which cannot act decisively. The banks have been protected from their own recklessness by a state too feeble to either force them to face the market or to take complete control. Instead we have a half way house which allows the banks to stop playing their role as providers of credit. Some people see the banking crisis as an example of taking too much risk. But there is a big difference between taking a calculated risk and sheer recklessness and stupidity.  The creation of toxic debt began as an attempt to spread and minimise risk. It became reckless once the people buying the debt stopped checking on what they were buying. This was just plain stupid.

There is not one part of our society , business, politics, culture, which has not become more risk averse. The way to challenge it in the first instance is through politics, something anybody can play a role in. We have to renew our democracy as the prelude and the process of renewing our economy and our society.

Making the trains run on time

3 07 2009

imagesFollowing the de facto nationalisation of the East Coast Rail line, no doubt David Miliband will be popping up to tell us this is another example of New Labour radicalism, alongside the nationalisation of the banks. What really happened is that another deal that the government did with the private sector has unravelled as soon as it looked as if National Express, the company concerned, would have to make some hard choices about how to run the railway during a downturn.

What does this episode tell us? Firstly it confirms the point made by James Heartfield in his essay on the state and the economy, that the state and private industry have become more and more interpenetrated. A key aspect of the deal between the government and National Express was that the government would pick up 80% of any losses. This is not free enterprise by any stretch of the imagination. It is effectively a state subsidy to a private industry, as are many of the big government related projects, particularly in the IT sector. This process is likely to go even further as the government struggles to provide key services during the recession.

The state certainly does have a key role in the management of big infrastructural projects such as the railways. But the current system where neither the state nor private enterprise take full control is the worst of all worlds. It is possible for the capitalist state to run big infrastructural projects successfully, as anybody who has travelled on French high speed trains or driven on their motorways knows. In Britain this ability appears to have been lost.

As it stands the system we currently have allows neither the market nor the state to operate effectively. The deal with National Express allowed them to walk away just as they should have been bringing their management skills to bear in keeping the railways going through a recession. Even with the 80% subsidy against loss, rather than tackle the difficulty choices, of how to cut costs, improve service and productivity, they simply gave up.