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

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Putting the no in innovation

8 05 2009

A dispiriting article in today’s Financial Times sums up much of what is wrong with the government’s approach to investment in innovation. In the last budget it was announced that £750 million would be set aside for a Strategic Investment Fund. This was presented as financial support for a new kind of positive ‘industrial activist’ strategy.

Leaving aside for the moment that one third of this money is set aside for low carbon business opportunities (see my previous blog  on this), there is obvious merit in funnelling funds into technology start-ups, even if the amount available, which is to cover a two-year period, is very small. The problem is that this fund was announced without any proper planning or discussion.  The Ministry which is supposed to adminster this fund was only told about it a few days before the announcement.

So we have an investment fund with no clear goals or any mechanism for distributing the money. As the report says, people are queuing up for access to this cash, and it is encouraging that there appears to be a strong demand for new investment. But the lack of clarity about what it is for or how it is to be administered throws doubt on how quickly it will be put to good use.

We are in a deep recession and any new technology investment would be a good thing, but the slapdash way this has been done betrays a lack of urgency in addressing the situation. This was summed up by the unnamed official who said there was no rush as they had 2 years to phase in the spending.